Empowering Businesses Supporting Tomorrow
Annual Report | 2017 CONTENTS
Overview Financial Statements Profile 04 Corporate information 34 Overview, Vision & Mission 05 Independent Auditors' Report to the 35 Financial Services 07 Shareholders Financial Highlights 10 Consolidated statement of financial position 37 Financial Review 11 Consolidated statement of profit and loss 38 Consolidated statement of comprehensive 39 Governance income Board of Directors 13 Consolidated statement of changes in equity 40 Chairman’s Statement 17 Consolidated statement of cash flows 41 Management Executive Committee 19 Notes to the consolidated financial statements 42 CEO’s Statement 23 Basel III Pillar III Disclosures 72 Management Review 29 Organization Chart 30 Corporate Governance 36 Financial Review 37
Bahrain Development Bank B.S.C. (c) BDB Building, Diplomatic Area, P.O. Box 20501, Kingdom of Bahrain T: (+973)17 511111 F: (+973)17 534005 E: [email protected] www.bdb-bh.com
View our Annual Report and other information about Bahrain Development Bank www.bdb-bh.com His Royal Highness His Majesty King His Royal Highness Prince Khalifa bin Salman Hamad bin Isa Prince Salman bin Hamad Al Khalifa Al Khalifa Al Khalifa
The Prime Minister of The King of the Kingdom The Crown Prince, the Kingdom of Bahrain of Bahrain Deputy Supreme Commander and First Deputy Prime Minister Bahrain Development Bank | Annual Report 2017
Overview
Bahrain Development Bank (BDB) provides a variety of financial services that are tailored to meet the needs of small and medium businesses in Bahrain and promote their development in both the industrial and service sectors.
BDB commenced its operations in Working in-line with Bahrain Economic 1992 as a specialist Bank. BDB's Vision 2030, BDB adopts a dynamic activities are focused on financing and effective strategy for stimulating and developing of small and entrepreneurial activity in implementing medium businesses in addition to its plans for financing & advising small encouraging and supporting the and medium businesses. entrepreneurship activities in the Kingdom of Bahrain. This strategy is in line with the Bank’s mission of being an active participant in national strategy by supporting this sector of the economy. BDB’s role in this context is especially significant given the growing size and contribution of this important segment to domestic economic activity.
SMEs are garnering special status and attention worldwide due to their comparative advantage relative to larger enterprises and projects.Hence, facilitating SME's development has positive impact on the development of the economy.
2 Bahrain Development Bank | Annual Report 2017
BDB adopts a dynamic and effective strategy for stimulating entrepreneurial activity in implementing its plans for financing & advising small and medium businesses.
Vision To support projects that yield substantial economic, social & environmental benefits. Mission To promote entrepreneurship & innovation in the Kingdom, by encouraging Bahraini professionals, enterprising women & ambitious youth, who demonstrate strong business acumen & leadership qualities in promoting the growth & prosperity of Small and Medium Enterprises (SMEs) through financial support and advisory services.
3 Bahrain Development Bank | Annual Report 2017
DIVERSIFIED RANGE OF PRODUCTS & Financial SERVICES Services Bahrain Development Bank offers a wide range of distinctive financial and advisory services specifically designed to meet SME’s special needs.
Over the years, BDB has expanded in delivering an innovative mix of financial and advisory products tailored to meet the needs of entrepreneurs and extended to reach out a broader spectrum of economic sectors including manufacturing, tourism, health, education, fisheries, agriculture, business Bahrain Development Bank (BDB) provides a variety professional sectors and other value-added of financial services at highly competitive interest services and activities. rates that are tailored to meet the needs of small and medium businesses in Bahrain and promote the development of small and medium-sized projects in both the industrial and service sectors.
• BDB Finance • BDB & Tamkeen Finance • Women Business Finance Scheme “Riyadat” • Overdraft Facility • Letters of Credit • Letters of Guarantee • Education Finance • Agricultural Loans • Fisheries Loans
4 Bahrain Development Bank | Annual Report 2017
Development Investment Services Services Strategic Report Corporate Governance
Development Services Division provides a holistic In line with The Kingdom of Bahrain’s Economic eco-system for entrepreneurs through its sub-units Vision 2030, the Investment Division works closely and departments which include; Business Advisory with the Banking and the Development Divisions to and Rowad Subsidiaries. The division hosts a identify opportunities and offer a complete platform unique set of products and services delivered for entrepreneurs consisting of a wide variety of through an innovative platform tailored to meet the products and services including Equity, Credit needs of entrepreneurs in various industries. Facilities, Advisory Services and Incubation.
• Rowad Coaching • Rowad Training • Rowad Incubation • Rowad Funding Financial Statements • Rowad Mentoring • Rowad Partners
5 Bahrain Development Bank | Annual Report 2017
Financial Highlights
2017 2016 2015 2014 2013
Income statement (BD thousands)
Net islamic financing and interest income 6,701 7,996 6,113 5,992 5,826
Other income 3,115 2,201 4,351 5,197 1,999
Operating expenses 9,335 9,279 8,954 7,204 6,312
Impairment provision on islamic financing and loans 8,152 1,971 477 3,280 1,861
Net profit (loss) (7,671) (1,053) 1,033 705 (348)
Dividend (percent) 0% 0% 0% 0% 0%
Balance sheet (BD thousands)
Total assets 176,170 211,333 198,140 174,306 157,814
Islamic financing and loans to customers 114,535 139,221 144,308 110,048 101,367
Investments 27,595 26,903 23,533 19,290 10,266
Total deposits 46,440 69,216 67,184 57,137 53,677
Customers’ deposits 35,084 58,541 49,098 38,321 40,283
Total Equity 72,685 80,361 81,233 75,822 71,196
Profitability
Return on average equity -10.02% -1.30% 1.32% 0.96% -0.49%
Return on average assets -3.96% -0.51% 0.55% 0.42% -0.22%
Earnings (loss) per share (fils) -118 -16 16 11 -5
Cost-to-income ratio 95% 91% 86% 64% 81%
Capital
Equity/total assets 41% 38% 41% 43% 45%
Total deposits/equity (times) 0.64 0.86 0.83 0.75 0.75
Capital adequacy 39.80% 38.61% 37.98% 44% 48%
Business indicators
Islamic financing and loans to customers/total assets 65% 66% 73% 63% 64%
Investments/total assets 16% 13% 12% 11% 7%
Islamic financing and loans to customers/customer deposits 3.26 2.38 2.94 2.87 2.52
Number of employees 182 188 203 200 186
6 Bahrain Development Bank | Annual Report 2017
Key Ratios
Net Interest Income Total Assets Total Equity (BD Millions) (BD Millions) (BD Millions) 6.701 176.170 72.685 Strategic Report
Net Interest Income (millions) Loans and Advances Cost to Income Ratio
9 Corporate Governance 8.00 144,308 8 150000 139,221 7 114,535 6.7 6.11 5.99 110,048 6 112500 101,367 5.83 5 4 75000 3 2 37500 95% 91% 86% 64% 1 81% 0 0 2017 2016 2015 2014 2013 2017 2016 2015 2014 2013
Net profit (loss) 000’s Financial Statements
100% 1,033 705 50% 0% 2017 2016 2015 2014 2013 -50% ( 7,671) (348) -100% (1,053)
7 Bahrain Development Bank | Annual Report 2017
8 Bahrain Development Bank | Annual Report 2017
Financial Review
Bahrain Development Bank (BDB) considers the following financial and strategic measures as key performance indicators (KPIs) of the Group’s overall performance for Strategic Report the year ended 31 December 2017.
Overview Net Islamic Finance and Interest Income Equity
The Bank reported a net loss for Net Islamic finance and interest The equity attributable to the Bank’s 2017 amounting to BD 7.67 million, income of BD 6.70 million reported shareholders, at BD 72.69 million, compared to a net loss of BD 1.05 a decline of 16 % (2016: BD 8.00 has decreased from BD 80.36 million Corporate Governance million reported last year. This million). at the end of 2016 on account of the increase was mainly due to a steep losses incurred. increase in the burden of specific Other Income Capital Adequacy Ratio provisions for Islamic financing and Total other income generated during loan losses by 314%. the year was BD 3.12 million (2016: As against minimum capital adequacy At year-end 2017, the Bank’s total 2.20 million) mainly from the rentals ratio of 12.5 % prescribed by the balance sheet stood at BD 176.17 income from subsidiaries. Central Bank of Bahrain (CBB), the Bank’s ratio at year end 2017 was million, compared to BD 211.33 million Operating Expenses at year-end 2016. The decline of 17% 39.80% (2016: 38.61%). The ratio, was mainly due to decrease in Islamic Operating expenses of BD 9.34 based on guidelines issued by CBB, financing and loans to customers by million were slightly higher by 0.6% which are compatible with those of 18%, placements with banks and compared to last year (2016: 9.28 the Basel Committee on Banking million). Supervision, measures total qualifying other financial institutions by 27% and Financial Statements customer deposits by 40%. capital held by an institution in relation Net Provisions to its risk weighted assets. The group has recognized impairment provisions amounting to BD 8.15 million on Islamic financing and loans for the year ended 31 December 2017, as compared to BD 1.97 million for year 2016.
9 Bahrain Development Bank | Annual Report 2017
Board of Directors
Khalid Al Rumaihi Chairman
Sabah Khalil Al-Moayyed Saleh Hassan Ali Hussain Member Member
Tariq Jaleel Al Saffar Tala Abdulrahman Fakhro Marwan Khalid Tabbara Member Member Member
Ghassan Ghaleb Abdulaal Maryam Adnan Al Ansari Member Member
10 Bahrain Development Bank | Annual Report 2017
Khalid Al Rumaihi Saleh Hassan Ali Hussain Marwan Khalid Tabbara Chairman Member Member Appointed the Chairman of the Bahrain Holds a Master’s degree in Business Administration Co-founder and Managing Partner of Stratum, a Development Bank in March 2016. Khalid from Brunel University in the United Kingdom with management consultancy firm headquartered in
Al Rumaihi was appointed as Chief Executive of over 35 years of banking experience. He is the the Kingdom of Bahrain. Mr. Tabbara represents Strategic Report the Bahrain Economic Development Board (EDB) President of Saleh Hussain Consultancy and holds distinguished experience in strategic and corporate in March 2015. Mr. Al Rumaihi currently serves as the following memberships: advisory. He has advised the firm’s clients on a Board Director of the National Bank of Bahrain, projects both regionally and internationally and has Bahrain Mumtalakat Holding Company, Bahrain Board Member and Head of Audit Committee of supported the development and growth of a range Tourism & Exhibitions Authority and Education ABC Islamic Bank, Bahrain, Board Member of of businesses. Having previously worked in the & Training Quality Authority. He remains a Board Solidarity Holding Company, Bahrain, Head of Global Corporate & Investment Banking division of Director of the EDB. Audit Committee of Alkhabeer Capital, KSA, Head Citigroup in New York, London, and Bahrain, he of Audit Committee of AlMajdouie Group, KSA, has also supported large private and public sector Mr. Al Rumaihi previously spent more than 10 years Member of Audit committee of Saudi Hollandi clients on a range of banking transactions within at Investcorp as a Managing Director, a member Bank, Board Member of Saudi Solidarity Takaful the Middle East and internationally. He currently of the Management Committee and Head of the Company, KSA and Audit Committee member of serves as Vice Chairman of the Board and Audit Institutional Placement Team covering Investcorp’s National Health Care Company, KSA. Committee Member of the Bahrain Bourse B.S.C. clients in the Gulf. Before joining Investcorp, Mr. (c) (Bahrain’s national stock exchange), and Al Rumaihi spent 9 years serving at J.P. Morgan Tariq Jaleel Al Saffar as Board Member and Investment Committee as head of the private client group in the Gulf. He Member Member of publicly listed Bahrain Flour Mills Chaired the Board of Bahrain Airport Company Company B.S.C. (Al-Matahin). and held previous Board positions at Gulf Air and A Bahraini Graduate with Bachelor of Business, Securities Investment Company (SICO). Marketing and entrepreneurship from Edith Cowan Mr. Tabbara holds a Master of Engineering
University in Perth, Australia, achieved distinctions Management and a Bachelor of Science in Corporate Governance He holds a Masters degree in Public Policy, in Enterprise and Creativity. Electrical Engineering and Economics from Duke specialising in Economic Development, from University, North Carolina, in the United States of He comes from a merchant family which focuses Harvard University, and a Bachelor of Science America. degree in Foreign Service from Georgetown on FMCG products and food distribution, has University. worked very closely with Multi-Nationals like Ghassan Ghaleb Abdulaal P&G, Clorox, Gillette, Kellogg’s, etc. Passion for Member Sabah Khalil Al-Moayyed technology; Set up the 1st electronic payment Member platform that allows payment of electricity and Heads the clients services function within the other utility bills as well as mobile top-ups. Has placement and relationship management team Managing Partner of Intellect Resources over 24 years’ experience working with local & at Investcorp since 2012. This is Mr. Abdulaal's Management W.L.L., a Management Consultancy Multi-National companies in the communication second stint at Investcorp having served with the firm. She is widely recognized as a veteran arena and distributions & operate and invest firm for six years previously between 2003-2009. banker and an advocate of promoting innovation, in Real Estate, Electronic Payments, Health In the intervening period between 2009 and 2012, leadership and entrepreneurship within industries Care and Distribution. He is the Board Member, he worked as an Investment Manager with Bahrain and organizations and is a regular speaker Mohamed Ebrahim Al Saffar Company ( MES), Mumtalakat Holding Company. Prior to joining at various regional and international forums. Bahrain Economic Development Board (EDB), Investcorp in 2003, Mr. Abdulaal worked at KPMG Al-Moayyed was the Chief Executive Officer at Telecommunication Regulatory Authority ( TRA), Consulting where he was a Consultant within the Eskan Bank Bahrain. Board member & Chairman of the Executive Business Performance Improvement Group. Prior committee of Bahrain International Circuit (BIC), to that, Ghassan worked briefly with the HEC Al-Moayyed holds a Bachelor of Science degree Chairman KKT Clinic, Chairman & CEO of Harbour School of Management in Paris. Financial Statements in Economics and Business Administration from Investment Holding company ( HIH),Chairman the American University of Beirut, Lebanon, and Payment International Enterprise B.S.C (PIE). Mr. Abdulaal holds a BA (Hons) in Accounting Masters in Business Administration Finance and Finance from the University of Kent at degree from Kelastat Business School, University Canterbury, UK, and an MSc in Analysis, Design of De Paul, Chicago and has attended executive Tala Abdulrahman Fakhro and Management of Information Systems from the management programs at leading universities in Member London School of Economics. the USA. She is the President of Bahrain Banker’s Association. Chairman of Pinebridge Middle East The Director of the Market Strategy & Intelligence Maryam Adnan Al Ansari Bank, Member of the Executive Committee EBDAA department at the Economic Development Member Bank, Member of the Board and Chair of Risk Board. Tala is a seasoned government Committee Naseej, Member of Vocational Training administration, fixed income products and Graduated from McGill University, in 2009 with a Committee for the Banking Sector Board, The legal professional with extensive experience of Bachelor in Commerce. She joined the Economic Deposit Scheme of Bahrain, American University of structuring and portfolio management experience Development Board in February 2010 as part Beirut Board of Trustee-Suleiman Olayan Business at Morgan Stanley in London, Gulf International of the Reform Projects department, where she School, Bahrain Chamber of Commerce Foreign Bank, the Saudi National Commercial Bank and contributed to revising the National Economic Trade Committee, Consultative Committee for NCB Capital in Bahrain. Strategy, and worked closely with the Ministry of Council of the Gulf States, Society of Honour Housing and the Ministry of Transportation and “Deltamiu” USA, Global Women Corporate She has a Bachelors in Economics from Smith Telecommunication on key strategic projects. In Directors, New York. Founding Member, The College, Northampton, holds a Juris Doctor May 2013, Ms. Al Ansari joined the Office of the GCC Women Corporate Directors Gulf Chapter from the Georgetown University Law Center in First Deputy Prime Minister as a member of the and Norway-Bahrain Business Council. Member Washington DC, and has passed the New York Projects department, where she is in charge of and Head of Economics Committee Supreme bar exam. Tala was appointed as a director of the strategic Housing and Infrastructure projects. Council for Women, Board of Trustees Bahrain board of Bahrain Development Bank in 2016. Bayan School, Board Member Mumtalakat Holding Company, Member / Chair of the Finance & Administrative Committee Higher Education Council.
11 Bahrain Development Bank | Annual Report 2017
Chairman Statement
It gives me great pleasure the annual report of Bahrain Development Bank Group, (the Bank and Its subsidiaries), including the financial statements, activities and operations for the year 2017.
The Bank was active during the reporting period as it remained steadfast in its mission to support the development of SME’s and facilitate entrepreneurship in the Kingdom in line with the Group’s strategy and Bahrain’s Economic Vision 2030.
The Bank undertook numerous financing and development activities during the reporting period, with a total of 917 projects funded with a total funding portfolio of BD 39.3 million for the year. Khalid Al Rumaihi In particular, the Bank financed various Chairman projects and initiatives in the industrial and service sectors through direct and indirect financing and capital participation. Funding was also provided for the Fisheries and Agricultural Programs and the Education Funding Program. The Bank has financed various Since the commencement of the Bank’s operations in 1992, I am pleased to report projects and activities in the industrial that the Bahrain Development Bank has supported the Kingdom’s SME’s with BD and service sectors through direct 565,856 million in funding. and indirect financing and capital In addition to funding, the Bank has joined hands with 3,699 beneficiaries, participation, as well as funding for the providing services that empower Bahraini entrepreneurs with a supportive Fisheries and Agricultural Programs and environment and the skills they need to succeed. This included the provision the Education Funding Program. of incubation services for start-ups as well as entrepreneurship awareness and training programs designed to develop skills and provide entrepreneurs with the experiences they need to contribute to Bahrain’s burgeoning entrepreneurial ecosystem.
12 Bahrain Development Bank | Annual Report 2017
I am also pleased to report that the Highness, Prince Khalifa bin Salman Al year witnessed substantial growth in Khalifa, Prime Minister, and His Royal the Kingdom’s non-oil sector, reflecting Highness Prince Salman bin Hamad Al the robust performance of the private Khalifa, Crown Prince, Deputy Supreme BD 39.3m sector as a result of the myriad of growth Commander and First Deputy Prime The financing portfolio. Strategic Report incentives, mechanisms and support Minister, for their wise leadership and programs that have been put in place to continued support. drive innovation and growth, of which the BDB continues to play a pivotal role. I would also like to express my deep appreciation to the members of the Board Aligned with the Bank’s dedication to of Directors, the Group’s employees and support the Kingdom’s plan to become all partners. We look forward to further 3,699 the region’s leading Fintech hub, the Bank collaboration as we seek to achieve our , in cooperation with other stakeholders, common goal of actively and substantially Beneficiaries benefited from the launched a number of joint initiatives contributing to the development of our development services. related to financial technology during national economy. the year. These initiatives included the introduction of financial technology
programs and partnerships that support Corporate Governance the Kingdom’s drive to enhance the digital economy, develop a technology-based entrepreneurship environment, and stimulate emerging projects in this field, In addition to facilitating access by small and young enterprises to appropriate Khalid Al Rumaihi technology and innovation. Chairman The Group remains unswerving in its commitment to support and develop Bahrain’s SME sector and will continue to enhance its offerings and programs to achieve this. The Group brings a wealth of accumulated expertise, policies and programs that have been proven to be highly efficient in enhancing the Financial Statements performance of Small and Medium- sized enterprises and increasing their contribution to the national economic development process.
I now take this opportunity to extend my sincere gratitude to His Majesty King Hamad bin Isa Al Khalifa, the King of the Kingdom of Bahrain, His Royal
13 Bahrain Development Bank | Annual Report 2017
Financial Services
Our specialized financing products under the BDB-Tamkeen Joint Finance Scheme continued to be much sought after by the SME segment. BDB-TAMKEEN JOINT The Bank continued its thrust on lending to the FINANCE SCHEME SME sector under the scheme. The focused segments where BDB extends assistance are the small and medium enterprises, self employed professionals, agriculture, fisheries, education, specific employment oriented enterprises promoted by Bahraini youth & women and other segments as considered necessary with the main objective of value addition to the economy of the Kingdom of Bahrain.
BD 39,3m Total value of loans provided
SMALL AND MEDIUM ENTERPRISES & SELF EMPLOYED PROFESSIONALS
14 VALUE ADDITION TO THE ECONOMY OF THE KINGDOM OF BAHRAIN.
15 Bahrain Development Bank | Annual Report 2017
Executive Management
Sattam Sulaiman Algosaibi Sh. Hesham Bin Mohammed Al Khalifa Adnan Mahmood Al Balooshi Chief Executive Officer Managing Director Deputy General Manager Bahrain Business Incubator Centers Head of Credit Division
Khaled Yousif Meshkhas Hasan Khalil Al Binmohamed Vijaya Kumar Teegalapally Deputy General Manager Senior Vice President Chief Risk Officer Support Division Human Resources & Corporate Communications
Samuel Verghese Areije Karim Alshakar Maitham A. Hameed Abbas Chief Financial Officer Senior Vice President Senior Vice President Development Division Business Development
Alok Misra Isa Ahmed Al Doseri Vice President Manager Internal Audit Head of Investment Division
16 Bahrain Development Bank | Annual Report 2017
Sattam Sulaiman Algosaibi Khalid Yousif Meshkhas Areije Karim AlShakar Group Chief Executive Officer Deputy General Manager - Head of Support Senior Vice President, Head of Development Mr. Algosaibi has over 20 years of banking experience Services Division occupying senior posts across several roles and Board Member of Bahrain Specialist Hospital BSC At BDB, Ms. AlShakar role and involvement responsibilities. In his experience, spanning some (C) & Estate Company for Health Services WLL includes coaching, mentorship, and entrepreneur of the most critical years for the banking sector and Gulf Diabetes Specialist Centre. Holds an development. She has been involved in the Strategic Report in Bahrain, he witnessed changing economic Associate Diploma in Accounting from University development of several support services, environments and evolving regulatory mindsets. of Bahrain and Advanced Banking Diploma from namely her role in establishing BDB’s Rowad This allowed him to have an in-depth understanding Bahrain Institute of Banking and Finance (BIBF). Program, a holistic entrepreneur support and practical knowledge in Islamic Banking and Mr. Meshkhas has gained more than 27 years of platform and SeedFuel-Rowad, a GAN member Conventional Commercial Banking best practices. combined banking experience from conventional accelerator program both managed and run Before joining BDB, Mr. Algosaibi spent over 12 years in Kuwait Finance House Bahrain BSC as an & Islamic banks. During his career he has worked out of the Development Services Division. Her Executive Manager and Head of Corporate Banking with National Bank of Bahrain and Al Salam role also involves the development of programs Group. He is the Chairman of The Arabian Taxi Bank in various Operation Departments such as with supporting organizations to support Company BSC, Board Member and Chairman of the Loans, Time Deposit, Money Transfer, Commercial entrepreneurship and develop the Bahrain startup Executive Committee of Seef Properties B.S.C. (c), Services, Customer Services and Treasury back & SME eco-system. office. Board Member of Binaa Al Bahrain BSC and a Board Ms. AlShakar has 15 years of experience in Member of Lama Real Estate WLL. He is also a He has also worked in the marketing field which banking and entrepreneurship. She has worked Member of the Board of Trustees of Ibn Khuldoon includes Retail & Commercial Banking. He joined in reputable organizations such as BNP Paribas National School. Bahrain Development Bank in 2011. and Lehman Brothers. She holds an MSc in Mr. Algosaibi holds a Bachelor degree in Accounting Public Policy and Management, from the School from King Fahad University of Petroleum and Minerals Hasan Khalil Al-Binmohamed of Oriental and African Studies (SOAS), University and an MBA degree from De Paul University. Senior Vice President - Head of Human of London and is a Certified Business Coach and Mentor, from CMI, UK. She is an avid reader, writer,
Resources & Corporate Communications Corporate Governance Sh. Hesham Bin Mohammed Al-Khalifa and an instructor of functional movement. Holds a B.A. in Government from Eastern Managing Director, Bahrain Business Washington University, USA; and a Diploma from Maytham A.Hameed Abbas Incubator Centers Spokane Falls Community College, USA. He has Sh. Hesham is a leading industry specialist on Senior Vice President - Head of Business obtained his CIPD in 2012 and attended Harvard Development entrepreneurship and economic development Business School’s Executive Program in 2013. He holding over twenty six years of experience. has 16 years of banking experience, having worked Mr. Abbas is the head of business development Throughout his career, he has contributed to the with Kuwait Finance House as HR Supervisor. He and the board secretary in the Bahrain development of numerous economic and social joined Bahrain Development Bank in 2005. Development Bank. In his role he leads the strategies and programs, namely the development formation and implementation of the Bank's and institutionalization of Bahrain-Arab Model for Vijaya Kumar Teegalapally strategy, product development and digitization Enterprise Development & Investment Promotion Senior Vice President - Chief Risk Officer initiatives. Before joining BDB Mr. Abbas held in coordination with Bahrain Development Bank a number of roles in Kuwait Finance House in Holds an MBA in Finance and has over 25 years (BDB) The United Nations Industrial Development corporate banking and credit risk management, of experience in banking and financial services Organization (Unido) and BDB’s Rowad program, as well as having held previous posts working industry and widely exposed to Financial Risk the development of Bahrain Business Incubator on investment promotion and entrepreneurship Management & Basel II/III implementation. His Centers, Riyadat (Women Incubator Center), Art with UNIDO and strategy consulting with BDO. areas of expertise includes Enterprise Risk Cluster and Farmers Market and various strategies Maytham is a graduate of McGill University in Management, Risk Management Policies & in economic development and entrepreneurship. economics and physics, and holds professional Procedures, IFRS 9 Expected Credit Loss models, qualifications in finance and risk management.
Sh. Hesham serves as board member of various Credit Portfolio Management, Operational Risk Financial Statements steering committees and societies in support of Management, Risk Analytics, Credit Scoring/ Alok Misra Rating models, Risk Appetite, Risk Strategy, Risk entrepreneurship such as MENA Inc, AIESEC, and Vice President - Head of Internal Audit KPMG Entrepreneurship. Architecture, Economic Capital, ICAAP and Stress Testing. Prior to joining BDB, Mr. Teegalapally was A Chartered Accountant from India and a Certified Adnan Mahmood Al Balooshi the Head of Risk Analytics for a commercial bank in Internal Auditor from the Institute of Internal Deputy General Manager – Head of Credit UAE. He has conducted several training programs Auditors, USA, Mr. Misra has over 29 years of Division and key note speaker at Risk Management events. banking, financial services and audit experience. He has worked in Internal Audit in banks in India, Board member of Asmak B.S.C. Closed. Attended He joined Bahrain Development Bank in 2016. Oman and Bahrain for the last 14 years. Prior programme for Financial Institutions for Private Samuel Verghese to joining BDB in 2015, Mr. Misra was the Head Enterprise Development and a programme of Internal Audit for a retail commercial bank in for Strategic Management for Leaders: Non- Vice President - Chief Financial Officer Bahrain for over 4 years. Governmental Organization both at Harvard Holds a B.Com, University of Calicut, India; and Kennedy School; also attended programme on FCA, Institute of Chartered Accounts of India. Has Isa Ahmed Al Doseri Project Appraisal and Risk Management from experience of over 28 years of which 22 years has Manager - Head of Investment Division Duke University. Has over 37 years of banking been in the Banking sector. Before joining BDB experience. He has worked with Bank of Bahrain & he has worked with Remya Plastics as Manager Mr. Al Doseri is a BSc honors graduate majoring Kuwait, Al Ahli Commercial Bank, Gulf Riyadh Bank (F&A),Steel Authority of India Ltd (SAIL) as Junior in Accounting and Finance from Ahlia University, a as Head of Credit Administration and Corporate Manager (Budget & MIS), The South Indian Certified Public Accountant from the State of Colorado, Manager. He joined Bahrain Development Bank in Bank Ltd, as Chief Manager (Corporate Financial USA and a Series 79 investment banking certificate holder accredited by the Central Bank of Bahrain. He is 2005. Management), Kerala Financial Corporation also a member of board of directors of Tenmou, Food as General Manager (Finance) and Oman Corp WLL., Rukn.me, Bahrain Business Incubator Development Bank as Chief Accountant. Center and Al Dar Wood Furniture Manufacturing WLL. He joined Bahrain Development Bank in 2007 as Mr. Al Doseri collectively has 8 years of professional Senior Manager (Financial Control) and was Head experience in venture capital, private equity, of Internal Audit from 2008 till April 2015. He was investments, retail, operations and financial control. He designated as BDB CFO in 2015. Joined BDB in 2011.
17 Bahrain Development Bank | Annual Report 2017
CEO Statement
The year 2017 witnessed a slow recovery of the global economy. The recovery process was most of the year according to the Government initiatives programs implemented in different countries. The past year has been a challenging year for the BDB Group, but we have reflected many aspirations and expressed our usual optimism and conviction that the best opportunities are yet to come. We have made every effort to achieve our goals in financing and supporting entrepreneurship and the development of small and medium enterprises.
Bahrain Development Bank Economic Indicators Performance Report for 2017 showed that the total financing portfolio reached BD 39.3 million, with 917 Sattam Sulaiman Algosaibi financing. Chief Executive Officer
BD 22m An expected additional value added.
5,954 The total number of funding disbursed in cooperation with Tamkeen.
18 Bahrain Development Bank | Annual Report 2017
An expected additional value added of end of January 2018 has reached to • To modernize the ways in which BD 22 million which will help in a creation more than BD 216,180 million with a services are offered and executed and of 3,619 jobs and an expected exports total number of 5,954 financing, which to reformulate policies and procedures value of BD 6.2 million. clearly demonstrates the effectiveness accordingly to assist in the process. of this program and the importance The bank has also cut down of assets Strategic Report With regards to development services, of the continuous work on developing that are currently not used in addition 3,699 beneficiaries benefited from it to meet the different needs and to looking into taking the right steps these services. These services included aspirations. towards financial precautions. business consulting, training, orientation, induction lectures and specialized • The Seed Fuel-Rowad investment In conclusion, I would like to express workshops in the field of entrepreneurship program, which is provided by the my thanks and appreciation towards as well as incubation services. Bahrain Development Bank Group the wise government for its continued (BDB) within Roward’s services and support. I would also like to express Initiatives 2017 programs, became a member of GAN my gratitude towards the Chairman • The focus in 2017 was on several Global Business Accelerator, a global and the members of the Board of aspects, first of which is the application gathering of the most advanced and Directors for their continuous guidance, of IFRS 9, which was imposed by professional business accelerators, in addition to all the local, regional and the Central Bank of Bahrain, and the Integrated to prepare and support international institutions working with the entrepreneurs from emerging bank, including our strategic partners second was the restructuring of the Corporate Governance Bank and its subsidiaries. entrepreneurs around the world. Tamkeen Bahrain, the Supreme Council for Women, Agriculture Affairs, and the • In line with the Bank’s strategy to • The Group is developing and expanding National Initiative for the Development of provide its services through integrated the scope of incubators by preparing the Agricultural Sector. and comprehensive branches, the four the launch of the farmers’ market in branches that were not providing full Hawrat Aali in 2018. I would also like to thank the Executive range of services have been closed. Management and all the employees of • Develop strategic plans to invest in These branches were located in Seef the Bahrain Development Bank Group human capital, which are considered Mall, Muharraq, Bab Al Bahrain, Isa at all levels and their efforts to achieve to be the most important assets Town and Hamad Town. the development goals of our precious for sustainable development and kingdom. • Bahrain Development Bank (BDB) has establish methodology that empowers joined the world’s first Islamic financial all employees towards excellence, technology consortium to accelerate creativity and success. the development of innovative, Sharia-
• Along the same line, several specialized Financial Statements compliant banking solutions. The training programs were launched, Bahrain-based ALCO Bahrain, consists Sattam Sulaiman Algosaibi including the launch of the “Nujoom of the largest bank in the financial Chief Executive Officer Attanmiya” program, that aims to sector, such as Albaraka Banking Group celebrate and award honorary and and Kuwait Finance House - Bahrain. outstanding employees on quarterly • The amount of funding disbursed in basis based on evaluations of job cooperation with Tamkeen since the performance set by the methodology launch of this program in 2008 until the put in place.
19 UNIQUE SET OF PRODUCTS AND SERVICES
TAILORED TO MEET THE NEEDS OF ENTREPRENEURS IN VARIOUS INDUSTRIES AND SECTORS
20 Bahrain Development Bank | Annual Report 2017
Development Services
An entrepreneurial division reaching out to the public in an effort to foster an entrepreneurial, innovative, and enterprising society. The division hosts a unique set of products and services delivered through an innovative platform tailored to meet the needs of entrepreneurs in various industries and sectors. Working in line with the National Economic Strategy and Bahrain Economic Vision 2030, the development Services Division provides a holistic eco-system for entrepreneurs through its sub-units and departments which include; Business Advisory and Rowad FOSTERING AN Subsidiaries. ENTREPRENEURIAL, INNOVATIVE, AND ENTERPRISING SOCIETY 3,699 Total number of beneficiaries
21 Bahrain Development Bank | Annual Report 2017
Management Review
Business Banking During the year 2017, the Bank also Development Services Division BDB as a development financial introduced new product “Tamweel Plus The Development Services Division institution has been playing a vital role Scheme” to assist SMEs in financing at BDB plays a key and effective role in the development of SME sector in start-up projects / undertake expansion within the entrepreneurial ecosystem, Bahrain. The Bank during the year 2017 at competitive pricing. The product has reaching out to the public in an effort continued to support financing small been well received by the SME sector. to inspire and grow entrepreneurship and medium businesses and start-up The Bank during 2017 made a total and innovation. The division highlights business ventures and encouraging / disbursement of 801 loans under SME the importance of developing a national motivating more of Bahraini youth and sector with a total funding of BD 37.9 economy driven by the private sector women to venture into the challenging million. The financing made by the Bank is through the organization’s core objective careers of entrepreneurship. expected to create additional 3,303 jobs and mandate of supporting entrepreneurs and enterprises in Bahrain. The product Our specialized financing products under and contribute to incremental exports of and service offered by the Development the BDB-Tamkeen Joint Finance Scheme BD 5.9 million, foreign currency of BD Services Division include the Rowad continued to be the much sought after 6.6 million, import substitution of BD 1.08 Program, SeedFuel-Rowad, and the product by the SME segment. The Bank million and value addition of BD 17.06 Invested Platform. continued its thrust on lending to SME million over the next two years. sector under the scheme. The Bank continued its financial Development Services Overview assistance to other priority sectors like Rowad is a comprehensive platform run fisheries and agriculture and professional out of the Development Services division services such as doctors, training and of Bahrain Development Bank designed consultancy firms, etc. thereby enabling to assist and empower entrepreneurs in BD 37.9 m the clients to acquire gainful self- starting their business. The program aims Total value of loans under SME sector employment and earn their livelihood. to support entrepreneurs and startup The Bank is also contributing towards eco-system by providing product and enhancing the level of education of the services at any stage of the business Bahraini youth through its Education cycle starting as early as the idea stage. Finance Scheme. The program’s objective is to foster the The Bank during 2017 undertook creation and development of enterprises re-organization and currently is operating and provide support to enhance the with the network of four branches located productivity and growth of enterprises at Main Corporate Office, Diplomatic and individuals by providing a holistic Area, Hidd Industrial Area, Sitra and A’ali. eco-system for entrepreneurs. The Rowad The re-organization is expected to help Program offers a variety of solutions the SME community with more focused supporting the needs of entrepreneurs to approach and efficient services. help start or grow their business through the Rowad Program, Seed-Fuel, and the The Bank looks forward to participate Invested platform. www.rowad.co more actively in financing to the SME segment. The Bank also remains committed to render all possible assistance to the SMEs who are in difficulties on account of the market conditions, to enable them to overcome their problems and conduct smooth business. The bank strategy of supporting Bahraini youth and women to start their own entrepreneurship ventures shall continue to receive our enhanced focus and dedicated efforts.
22 Bahrain Development Bank | Annual Report 2017
Management Review (Continued)
ROWAD Strategic Report
1618* UNIQUE COMPANIES ENTERED THE ROWAD PROGRAM * since program inception in 2015
ROWAD COACHING ROWAD TRAINING ROWAD MENTORING Corporate Governance 515 1441 36
Coaching sessions were Beneficiaries attended Active Mentors Joined the provided through the Reaining. workshop and Rowad Mentoring Program Rawad Program presentation sessions through the Rawad Program
ROWAD PARTNERS ROWAD NETWORK ROWAD EVENTS Financial Statements
20 3000 1834
Partners joined the Rowad Member in the Rowad Member attended event Partners Program community network through the Rawad Program
23 Bahrain Development Bank | Annual Report 2017
Management Review (Continued)
Invested™ In addition to specialized courses, Invested is an investor community workshops and conferences were BD 21 m platform established in 2016. The attended by the approved persons and BDB holds investments in 26 companies Invested Platform provides investors key staff. access to tools and knowledge to with a total Fair value of BHD 21 million. Investment Division support them through their startup investment journeys. Invested has a In line with The Economic Vision 2030 growing investor population that includes for Bahrain to promote economic angels, VCs, and corporates. Invested diversification, Bahrain Development Rowad Program hosts educational events twice a year Bank, BSC (c) (“BDB”) currently supports The Rowad Program offers solutions targeted to current angels and potential the private sector through a number of supporting the needs of entrepreneurs startup investors as part of the aim to business support services, research, and to help start or grow their business further develop the startup eco-system financing. pillars. through 8 pillars which include Coaching, As part of BDB’s continued efforts to Training, Mentoring, Funding, Partners, The investor community is brought assist entrepreneurs and the private Networking Events, and Rowad Tools. together through an online platform sector, the bank created a new dedicated The program is available to startups, www.rowad.co/invested which is division (Investment Division) to launch SMEs, and entrepreneurs from as early currently owned and managed by the and manage a new set of direct equity as idea stage all the way to growth and team at Bahrain Development Bank. investment products (new Venture Capital beyond. The program offers its services Funds and other products and services). through various packages that provide Rowad Events: Rowad Events was tools to startups and SMEs at any stage launched in 2015 to play an instrumental Investment Division is responsible for all of the business cycle. The program acts role in building and connecting the local direct equity investments that BDB makes as an eco-system builder working closely and regional entrepreneur community. in line with its overall mission, as well as with the startup and SME eco-system in A suite of events are hosted throughout new SPVs launched where BDB plays a Bahrain. the year that include Rowad Majlis™, significant role as sponsor and manager. Rowad Talk™, Rowad Workshops™, The The Investment Division invested and Seed Fuel Speed™, Pitched™, and Invested™. continues to invest in Startups, scale ups Seed Fuel-Rowad is Bahrain’s pioneer and SMEs, In addition to other strategical accelerator program developed by the Human Resources investments. Direct equity investments are Bahrain Development Bank, providing Recognizing that staff members are the investments made in exchange for shares startups at seed and early stages with in a specific company based on certain coaching, mentoring, training, access to key asset of any organization, the Bank continued to significantly invest in the criteria depending on the investment investors and networks, special startup product on hand. This equity investment’s services and perks, and up to BHD staff welfare and the provision of the necessary training and development aim is to assist the entrepreneurs in 25,000 in equity investment funding. achieving their goals. Seed Fuel-Rowad is part of the Global opportunities. During the year 2017, Accelerator Network (GAN) as a pioneer 98% of our employees (182 employees BDB holds investments in 26 companies accelerator building startup communities. as of December 2017) attended in order to create a robust and diversified www.seedfuel.co several in-house training sessions and private sector in The Kingdom of Bahrain, other courses run by external training supporting industries as Food Security, institutions in Bahrain. Transportation and Services, Microfinance, Staff members were trained on Leadership Healthcare, Business Incubators and Development, Anti-Money Laundering, others, with a total Fair value that Islamic Financing, Risk Management & amounts to BHD 21 million. Control Framework, Risk and Control During the year 2017, BDB’s Investment Self-Assessment (RCSA), Credit Analysis, Division has supported to create about FinTech, International Standards for the 155 new jobs with a value added over Professional Practice of Internal Auditing, BHD4.5 million. Proficiency/Due Professional Care/ Quality Assessment, Cyber Security and Corporate Governance.
24 Bahrain Development Bank | Annual Report 2017
Management Review (Continued)
The Investment Division is also working Renovation of the HQ Data Center was closely with the Economic Development also carried out with enhanced physical Board in launching AL Waha Venture security and established effective server Capital Fund of Funds, a USD 100 and rack management procedures. The million fund which will invest in Local and CCTV solution also underwent major Strategic Report Regional Venture Capital Funds with the upgrades with the introduction of high- Ultimate goal to support SMEs in Bahrain definition cameras, more storage space in different sectors and Industries and and higher retention period of recordings. cover major Capital Market Funding Gaps. Bank’s infrastructure systems were also The Fund will be managed by Bahrain upgraded to newer version of Domain Development Bank. Controller, Microsoft Exchange and file servers with higher storage. New In Addition to that, the Investment Division back up and replication solutions were is also working closely with Bahrain introduced to safeguard the bank’s data. Bourse to support the launching of the Comprehensive centralized door access new secondary market targeting private solution was also introduced as part of SMEs (Bahrain Investment Market), compliance and security measures. backed by Venture Partners and Private Investors, where those companies are Bank’s internal IP Telephony System looking for new shareholders and are also underwent upgrade to a newer PBX under ambitious expansion projects. and Devices. Introduced an information Corporate Governance security awareness system to increase Support Services Division security awareness among the bank’s Support Services Division provides employees. Additional mobile device back end banking services to support management security features were also ongoing business activities of Bahrain introduced in the year. Development Bank Group, as well as The bank achieved significant operational supporting the Group’s strategies and progress through strategic relocations assist in achieving its goals through: of the branches network in order to Information Technology, Operations and strengthen its reach of contact. Administration Department. Administration Department plays a key Year 2017 witnessed the achievement of assisting role in the successful completion of many initiatives, that focus on the art of significant projects, via providing exceptional technology in order to build the business, swift support to BDB Group, which improve the customer satisfaction, meet
increased the overall efficiency. Besides, Financial Statements the statutory and regulatory compliance developing and executing Internal and management goals. Major upgrade Purchasing Policy, to maintain smooth and to the core banking application was risk free procurements, allowing Bahrain carried out by introducing charge off market service providers and vendors functionality, so as to keep the bad debt equal shares, in addition to reducing cost accounts off the balance sheet. As part significantly by an ongoing market survey of the BENEFIT compliance requirement, and finding other solutions and alternatives. several mandatory fields for Loans were Administration Department demonstrated introduced. Efficiency of the loan approval excellent abilities in terms of assistance and work flow was improved by revisiting and maintaining data base. enhancing the entire process flow in the ERP application.
25 Bahrain Development Bank | Annual Report 2017
Investment Services
The Investment Division works closely with the Banking Division and the Development Division to identify opportunities and offer a complete MINORITY INTEREST platform for entrepreneurs consisting of a EQUITY PARTICIPATION wide variety of products and services including Equity, Credit Facilities, Advisory Services and Incubation. Investment Division provides minority interest equity participation as a shareholder into private companies as means of financing. Investments can be made at different levels of a firm’s business cycle, including establishment and growth stage, focusing primarily on businesses with opportunity to be leaders in a fragmented market, firms with potential for going international, and those with high commitment from both its owners and management. 155 Investment Division has supported to create about 155 new jobs
ESTABLISHMENT AND GROWTH STAGE
26 Bahrain Development Bank | Annual Report 2017
EXTENSIVE EXPERIENCE IN DIFFERENT INDUSTRIES
27 Bahrain Development Bank | Annual Report 2017
Organization Chart
BOARD OF DIRECTORS
Board Board Board Remuneration Sharia Chief Executive Board Risk Investment Audit & Governance Board Officer Committee & Credit Committee Committee Committee
Sharia Compliance Internal Reviewer Officer Audit
Human Resources Business Credit Investment Development Chief Risk Banking Chief Financial Support & Corporate Development Division Division Division Officer Division Officer Division Communications & Board Secretary
Credit Operations & Human Business Risk Branches Financial Administration Operations Resources Advisory Management Co-ordinator Control & Control Compliance
Remedial Corporate Management Tamkeen Unit Treasury Administration Communications & Collection
Corporate Information Credit Technology Review
Trade Finance
28 Bahrain Development Bank | Annual Report 2017
Corporate Governance
BDB is committed to full compliance The Board of Directors is assisted The BICC reviews credit and investment with the values and the best international by the following Board Committees: proposals, exercises oversight of credit practices/standards of personal and (1) Remuneration and Governance and investment related activities, reviews professional ethics. Fulfilling this Committee, (2) Audit Committee, (3) and recommends the Bank’s business
commitment requires that everything Risk Committee, (4) Credit & Investment strategy and operational plan, reviews Strategic Report done by the group, either collectively or Committee, and (5) Sharia Supervisory and approves appropriate asset allocation individually, is consistent with the highest Board. The members of Senior strategy and evaluates the investment ethical and professional standards. Management regularly attend Board & and credit portfolio of the bank. The Committee meetings. Sharia Supervisory Board comprising BDB’s Board Directors have validated three Islamic scholars provides guidance, the Corporate Governance principles The responsibilities of these committees reviews and supervises the Bank’s Islamic and practices in the policy documents, for oversight are governed by their financing activities to ensure that they are (1) Commitment by Board of Directors & respective Charters, terms of reference in compliance with Islamic Sharia’s rules Management of BDB Group to the Code and functions under its supervision that and principles. of Conduct and (2) the Code of Ethics & are reviewed and updated periodically. Business Conduct, which are endorsed While RGC is assisting the Board in In addition, the Remuneration & by BDB employees. strengthening the corporate governance Governance Committee, Investment standards and implementation of sound & Credit Committee and Audit & Risk BDB’s Board of Directors, nominated by
remuneration and HR practices, the Audit Committee also assist the Board in Corporate Governance a Royal Decree, presently comprises of Committee assists the Board in carrying conducting self-evaluation of the Board eight non-executive directors, including out its duties regarding the integrity of & Committees achieving a high level the Chairman. The Board is guided the Bank’s financial reporting system; of involvement and understanding by its Charter framed in accordance the adequacy of the Bank’s internal among Board members of its roles and with applicable regulations. The Board control processes; the performance responsibilities, with suggestions for establishes the objectives of the bank, of independvent auditors and internal further improvements. provides guidance & approves the audit function; the independent auditor’s strategy, budgets for achievement of the qualifications & independence and the Bank’s objectives, adopts and reviews Bank’s compliance with legal obligations. the systems and controls framework, monitors the implementation of strategy The Board Risk Committee develops by the management, overall group & the Board’s risk appetite statement and management performance, ensures ensures an appropriate risk management accurate preparation along with and reporting framework is in place to disclosure of the financial statements, allow implementation and monitoring
monitors conflicts of interest in preventing of the Bank’s risk profile and alignment Financial Statements improper related party transactions. of this to its risk appetite. The BRC The Board also provides assistance is additionally responsible for the in securing funding from government appointment and remuneration of the and semi-government institutions and CRO and the development of the bank’s continues to focus on long term strategic business continuity and disaster recovery issues; growth and diversification of BDB plans. group’s activities, and the achievement of its vision and mission.
29 Bahrain Development Bank | Annual Report 2017
Corporate Governance (Continued)
Board Meetings and Attendance
Details of meetings held during 2017 and attendance of directors are as follows:
Ref. Name Feb 22 Apr 30 Aug 9 Oct 23 Dec 19 1 Khalid Al Rumaihi check check check check check 2 Sabah Khalil Al-Moayed check check check check check 3 Saleh Hassan Ali Hussain check check check check 4 Tariq Jaleel Al Saffar check check check 5 Marwan Khalid Tabbara check check check check 6 Tala Abdulrahman Fakhro check check check check check 7 Ghassan Ghaleb Abdulaal check check check check 8 Maryam Adnan Al Ansari check check check check check
Board Audit Committee (BAC) Meetings and Attendance
SN Name of the director Feb 12 Apr 18 Jul 16 Aug 27 Oct 15 1. Saleh Hassan Ali Hussain check check check check check 2. Ghassan Ghaleb Abdulaal check check check check 3. Maryam Adnan Al Ansari check check check check check
Board Investment and Credit Committee and Attendance
SN Name of the Director Feb 8 Apr 3 Apr 19 Jun 6 Jul 17 Oct 16 Dec 11 Dec 24 1. Sabah Khalil Al-Moayed (Chairperson) check check check check check check check check 2. Marwan Khalid Tabbara (Member) check check check check check check check check 3. Tariq Jaleel Al Saffar (Member) check check check check check check check check 4. Tala Abdulrahman Fakhro (Member) check check check check check check check check
Board Risk Committee
SN Name of the director May 29 Sep 26 Oct 16 Nov 16 Dec 10 1. Marwan Khalid Tabbara (Chairman) check check check check check 2. Ghassan Ghaleb Abdulaal (Member) check check check check 3. Maryam Adnan Al Ansari (Member) check check check check check
30 Bahrain Development Bank | Annual Report 2017
Corporate Governance (Continued)
Board Remuneration & Governance Committee Meetings and Attendance
SN Name of the director Jan 11 Apr 3 Jun 15 Oct 22 Dec 19 1. Khalid Al Rumaihi (Chairman) check check check check Strategic Report 2. Tala Abdulrahman Fakhro (Member) check check check check check 3. Tariq Jaleel Al Saffar (Member) check check check × check
Shari’a Board and Attendance
Board Member Jan 15 Apr 5 Jul 12 Oct 9 1. Sh. A. Nasser Omar Al Mahmood check check check check 2. Sh. Muhammed Burhan Arbouna check check check check 3. Sh. Omar Alani check check check check
Remuneration Report Corporate Governance
The Bank follows a total compensation approach to remuneration for rewarding performance as well as providing competitive fixed remuneration for attracting and retaining talents. It is the Bank’s basic compensation philosophy to provide a competitive level of total compensation to attract and retain qualified and competent employees. These elements support the achievement of the objectives through balancing rewards for both short-term results and long-term sustainable performance. The strategy is designed to share the success, of the Bank and to align employees’ incentives with the risk framework and risk outcomes.
The quality and long-term commitment of all of the employees is fundamental to the success of the Bank. The Bank, therefore aims to attract, retain and motivate the very best people who are committed to maintaining a career with the Bank, and who perform their role in the long-term interests of its shareholders.
Bank adopted regulations concerning sound remuneration practices issued by the Central Bank of Bahrain. The revised policy framework and incentive components were approved by the shareholders in the Annual General Meeting.
Unlike commercial banks, BDB is a “not-for-profit” development banking institution, with core objective of supporting economic development of Bahrain in line with Bahrain 2030 Vision. Bank’s remuneration policy has no variable components as per the contractual obligation and the performance bonus will be paid at the discretion of the Board of Directors. There is no separate Financial Statements policy for business and controlling staff of the Bank. As such, the need to “defer” variable remuneration does not apply in case of BDB. Consequently, there are no “claw-back” or “malus” stipulations as well. The exceptions were approved by the Central Bank of Bahrain.
31 Bahrain Development Bank | Annual Report 2017
Corporate Governance (Continued)
Details of Remuneration Paid for the Financial Year Ended 2017
Variable Fixed Remuneration Remuneration Other Performance Salaries Benefits/ Bonuses Categories No. & Wages Allowances Total (in cash) * Total 1. Members of the Board 8 33,750.000 33,750.000 33,750.000 2. Approved Persons 6 328,748.333 85,874.218 414,622.551 84,116.667 498,739.218 (not incl in 1,3, to 7) 3. Approved Persons in Risk 6 210,838.000 96,982.818 307,820.818 47,000.000 354,820.818 Management, Internal Audit, Operations, Financial Control, AML, Compliance Functions 4. Employees Engaged in Risk 56 788,012.200 142,793.712 930,805.912 103,651.600 1,034,457.512 taking activities (Business Areas) 5. Employees other than approved 23 274,827.972 54,906.896 329,734.868 49,687.434 379,422.302 persons engaged in functions under 3 6. Other Employees 90 1,052,392.268 220,799.153 1,273,191.421 187,265.073 1,460,456.494 Total 189 2,654,818.773 635,106.797 3,289,925.570 471,720.774 3,761,646.344
* Amounts are in Bahraini Dinars.
The details of remuneration paid to auditors for audit and other assignments are available at the BDB corporate office.
Deposit protection scheme:
Deposits held with the Bank’s Bahrain operations are covered by the regulation protecting Deposits and Unrestricted Investment Accounts issued by the Central Bank of Bahrain in accordance with Resolution No (34) of 2010. The scheme applies to all eligible accounts held with the Bank subject to specific exclusions, maximum total amount entitled and other regulations concerning the establishment of a Deposit Protection Scheme and a Deposit Protection Board.
32 Strategic Report Corporate Governance Financial Statements 33 | Annual Report 2017 Bank | Annual Development Bahrain Corporate information Report to the Shareholders Independent Auditors' Contents 34 35 37 position Consolidated statement of financial 38 and loss Consolidated statement of profit 39 income Consolidated statement of comprehensive 40 in equity Consolidated statement of changes 41 statement of cash flows Consolidated 42 consolidated financial statements Notes to the Financial Statements 2017 Statements Financial Bahrain Development Bank | Annual Report 2017
Corporate information
Commercial registration no. 26226 obtained on 20 January 1992
Directors Mr. Khalid Al Rumaihi – Chairman Ms. Sabah Khalil Al Moayyed – Board Member Mr. Saleh Hassan Ali Hussain – Board Member Mr. Tariq Abduljalil Al Saffar – Board Member Mr. Marwan Khalid Tabbara – Board Member Ms. Tala Abdulrahman Fakhro – Board Member Mr. Ghassan Ghaleb Abdulaal – Board Member Ms. Maryam Adnan Al Ansari – Board Member
Registered office Building 170 Road 1703 Diplomatic Area P.O. Box 20501 Manama Kingdom of Bahrain
Auditors KPMG Fakhro 12th Floor, Fakhro Tower P.O. Box 710 Manama Kingdom of Bahrain
34 Bahrain Development Bank | Annual Report 2017
Independent Auditors' Report to the Shareholders Bahrain Development Bank B.S.C(c) Manama, Kingdom of Bahrain
Report on the audit of the consolidated financial statements Opinion We have audited the accompanying consolidated financial statements of Bahrain Development Bank B.S.C (c) (the “Bank”) and its subsidiaries (together the “Group”), which comprise the consolidated statement of financial position as at 31 December 2017, the consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. Strategic Report In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2017, and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors’ responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information The board of directors is responsible for the other information. The other information obtained at the date of this auditors’ report is the Chairman’s report.
Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance Corporate Governance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditors’ report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibility of the board of directors for the consolidated financial statements The board of directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as the board of directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the board of directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the board of directors either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Financial Statements Auditors’ responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: - Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. - Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. - Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the board of directors. - Conclude on the appropriateness of the Board of Directors’ use of the going concern basis of accounting and, based on the audit
35 Bahrain Development Bank | Annual Report 2017
Independent Auditors' Report to the Shareholders (Continued) Bahrain Development Bank B.S.C(c) Manama, Kingdom of Bahrain
evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. - Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. - Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with the board of directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on other regulatory requirements As required by the Bahrain Commercial Companies Law and (Volume 1) of the Central Bank of Bahrain (CBB) Rule Book, we report that: a) the Bank has maintained proper accounting records and the consolidated financial statements are in agreement therewith; b) the financial information contained in the directors’s report is consistent with the consolidated financial statements; c) we are not aware of any violations during the year of the Bahrain Commercial Companies Law, the Central Bank of Bahrain and Financial Institutions Law, the CBB Rule Book (Volume 1, applicable provisions of Volume 6 and CBB directives) or the terms of the Bank’s memorandum and articles of association that would have had a material adverse effect on the business of the Bank or on its financial position; and d) satisfactory explanations and information have been provided to us by management in response to all our requests.
KPMG Fakhro Partner Registration No. 83 27 February 2018
36 Bahrain Development Bank | Annual Report 2017
Consolidated statement of financial position 31 December 2017 (Expressed in Thousand Bahraini Dinars)
Note 2017 2016 ASSETS Cash and balances with Central Bank of Bahrain 5 2,873 4,095 Placement with banks and other financial institutions 6 27,011 37,106
Islamic financing and loans to customers 7 114,535 139,221 Strategic Report Investment securities 8 15,143 14,220 Investment in associates 9 419 419 Investment property 10 12,033 12,264 Property and equipment 11 1,216 1,242 Other assets 12 2,940 2,766 TOTAL ASSETS 176,170 211,333 LIABILITIES AND EQUITY Liabilities Term loans 13 51,674 56,150
Deposits 14 46,440 69,216 Corporate Governance Other liabilities 15 5,371 5,606 Total liabilities 103,485 130,972 Equity Share capital 16 65,000 65,000 Statutory reserve 17 1,186 1,186 Other capital contribution 18 4,048 4,048 Retained earnings & other reserves 2,461 10,121 Equity attributable to owners of the Bank 72,695 80,355 Non-controlling interest (10) 6
Total equity 72,685 80,361 Financial Statements TOTAL LIABILITIES AND EQUITY 176,170 211,333
These consolidated financial statements, set out on pages 37 to 71, were approved for issue by the Board of Directors on 27 Feb 2018 and signed on its behalf by:
Khalid Al Rumaihi Ghassan Ghaleb Abdulaal Chairman Director
37 Bahrain Development Bank | Annual Report 2017
Consolidated statement of profit and loss For the year ended 31 December 2017 (Expressed in Thousand Bahraini Dinars)
Note 2017 2016 Income Islamic financing and interest income 19 9,004 10,271 Islamic financing and interest expense 20 (2,303) (2,275) Net islamic finance and interest income 6,701 7,996 Fee and commission income 407 421 Investment income 21 177 (222) Share of loss in associates - (15) Other income 22 2,531 2,017 Total income 9,816 10,197 Expenses Staff cost (4,626) (5,119) Other operating expenses (4,709) (4,160) Profit before impairment provision 481 918 Impairment provision on islamic financing and loans 7 (8,152) (1,971) Loss for the year (7,671) (1,053) Loss attributable to: - Owners of the Bank (7,660) (1,035) - Non-controlling interest (11) (18) (7,671) (1,053)
These consolidated financial statements, set out on pages 37 to 71, were approved for issue by the Board of Directors on 27 Feb 2018 and signed on its behalf by:
Khalid Al Rumaihi Ghassan Ghaleb Abdulaal Chairman Director
38 Bahrain Development Bank | Annual Report 2017
Consolidated statement of comprehensive income For the year ended 31 December 2017 (Expressed in Thousand Bahraini Dinars)
2017 2016 Loss for the year (7,671) (1,053) Other comprehensive income Items that will not be reclassified to profit or loss:
Share of revaluation reserve from associate - 181 Strategic Report Total other comprehensive income for the year - 181 Total comprehensive income for the year (7,671) (872) Total comprehensive income attributable to: - Owners of the Bank (7,660) (854) - Non-controlling interest (11) (18) (7,671) (872) Corporate Governance Financial Statements
The accompanying notes 1 to 29 form part of these consolidated financial statements.
39 Bahrain Development Bank | Annual Report 2017
Consolidated statement of changes in equity For the year ended 31 December 2017 (Expressed in Thousand Bahraini Dinars)
Retained Investment earnings Non - Share Statutory fair value Other capital & other Controling Total capital reserve reserve contribution reserves Total Interest Equity As at 1 January 2017 65,000 1,186 - 4,048 10,121 80,355 6 80,361 Loss and other comprehensive income for the year: Loss for the year - - - - (7,660) (7,660) (11) (7,671) Minority interest movement )5( )5( Balance at 31 December 2017 65,000 1,186 - 4,048 2,461 72,695 (10) 72,685 As at 1 January 2016 65,000 1,186 - 4,048 6,959 77,193 24 77,217 Prior period adjustment - - - - 4,016 4,016 - 4,016 Restated balance at 1 January 2016 65,000 1,186 - 4,048 10,975 81,209 24 81,233 Loss and other comprehensive income for the year: Loss for the year - - - - (1,035) (1,035) (18) (1,053) Other comprehensive income: Items that will not be reclassified to profit or loss: Share of revaluation reserve from associates - - - - 181 181 - 181 Total loss and comprehensive income for the year - - - - (854) (854) (18) (872) Balance at 31 December 2016 65,000 1,186 - 4,048 10,121 80,355 6 80,361
The accompanying notes 1 to 29 form part of these consolidated financial statements.
40 Bahrain Development Bank | Annual Report 2017
Consolidated statement of cash flows For the year ended 31 December 2017 (Expressed in Thousand Bahraini Dinars)
Note 2017 2016 Operating activities Loss for the year (7,671) (1,053) Adjustments for:
Depreciation 10,11 919 765 Strategic Report Provision for impairment of islamic financing and loans to customers 8,152 1,971 Changes in fair value of FVTPL investments (60) 326 Dividend income (117) (89) Share of loss of associates - 15 Gain on sale from investments - (15) Loss on foreign currency translation 51 76 Operating profit before changes in operating assets and liabilities 1,274 1,996 Changes in operating assets and liabilities:
Placement with banks and other financial institutions 2,811 539 Corporate Governance Accounts receivable and other assets (174) (60) Islamic financing and loans and to customers 16,534 3,116 Deposits (22,776) 2,032 Accounts payable and other liabilities (235) 1,206 Net cash (used in) / from operating activities (2,566) 8,829 Investing activities Purchases for property and equipment (net of disposal) (412) (265) Purchase of investments (3,068) (6,216) Proceeds from maturity / sale of investments 2,200 2,279 Financial Statements Purchases in investment property (250) - Dividend income received 117 89 Net cash used in investing activities (1,413) (4,113) Financing activities (Payment)/Proceeds from term loan net (4,476) 10,827 Net cash (used in) / generated from financing activities (4,476) 10,827 Net (decrease) / Increase in cash and cash equivalents during the year (8,455) 15,543 Cash and cash equivalents at 1 January 24,979 9,436 Cash and cash equivalents at 31 December 23 16,524 24,979
The accompanying notes 1 to 29 form part of these consolidated financial statements.
41 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2016 (Expressed in Thousand Bahrain Dinars)
1 Reporting entity Bahrain Development Bank B.S.C. (c) (“the Bank” or “BDB”) was established as a Bahraini closed shareholding company by Legislative Decree number 19 dated 11 December 1991 and commenced operations on 20 January 1992. The Bank is registered with the Ministry of Industry and Commerce under commercial registration (CR) number 26226. The Bank’s registered office is in Kingdom of Bahrain. The Bank is operating as a retail bank with special waivers under a license issued by the Central Bank of Bahrain (“CBB”). The core activities of the Bank consist of granting loans and islamic financing for project finance, working capital, premises and equipment for developing industries and service sectors such as tourism, health and education in the Kingdom of Bahrain. As part of this activity, the Bank also renders management consultancy services and subscribes in ordinary and preference shares in Bahraini companies. Additionally, loans and islamic financing are provided for agriculture, fisheries and higher education purposes. Other activities of the Bank comprise making direct contributions toward the economic development of the Kingdom of Bahrain. The Group consists of the Bank and its following subsidiaries: Country of Ownership Name Incorporation interest Year end Principal activity Bahrain Business Incubator Centre S.P.C. Bahrain 100% 31 December Development and assistance to emerging Bahraini entrepreneurs. BDB SME Fund Company BSC © (note a) Bahrain 99% 31 December Managing SME funds Bahrain Export Development Center S.P.C Bahrain 100% 31 December Management consultancy activities Middle East Corner Consultancy CO. WLL (note b) Bahrain 28.6% 31 December Consultancy to small and medium enterprises. Al Waha Venture Capital Fund Company Bahrain 99.0% 31 December Trusts, Funds and similar financial entities Fund company a) The shareholders of BDB SME Fund Company in their meeting dated 14 December 2016, decided to voluntarily liquidiate the Company. The Company does not have any operations. b) The Bank is exposed, or has rights, to variable returns from its involvement with Middle East Corner Consultancy Co. WLL; and has the ability to affect those returns through its power over Middle East Corner Consultancy Co. WLL and thus is deemed as subsidiary of the Bank.
2 BASIS OF PREPARATION a) Statement of compliance The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and the requirements of the Bahrain Commercial Companies Law (BCCL) 2001. b) Functional and presentation currency The consolidated financial statements are presented in Bahraini Dinars (BD) which is the functional currency of the Group and all the values are rounded to the nearest thousand. c) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: - investments in equity instruments are measured at fair value; - other financial assets (debt instruments) not held in a business model whose objective is to hold assets to collect contractual cash flows or whose contractual terms do not give rise solely to payments of principal and interest are measured at fair value;
42 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
2. BASIS OF PREPARATION (CONTINUED) d) New standards, amendments and interpretations effective from 1 January 2017 The following standards, amendments and interpretations, which became effective as of 1 January 2017, are relevant to the Group: i) Disclosure Initiative (Amendments to IAS 7) The amendments require disclosures that enable users of consolidated financial statements to evaluate changes in liabilities arising from
financing activities, including both changes arising from cash flow and non-cash changes. Strategic Report The amendments are effective for annual periods beginning on or after 1 January 2017 on prospective basis. The new disclosure requirements have been included in these consolidated financial statements in note 13, where the Group has presented a reconciliation between the opening and closing balances for liabilities with changes arising from financing activities. ii) Annual Improvements to IFRSs 2012–2014 Cycle – various standards. The annual improvements to IFRSs to 2014-2016 cycles include certain amendments to various IFRSs. earlier application is permitted (along with the special transitional requirement in each case), in which case the related consequential amendments to other IFRSs would also apply. The following are the key amendments in brief: -- IFRS 12 Disclosure of Interests in Other Entities – The disclosure requirements for interests in other entities also apply to interests that are classified as held for sale or distribution. Effective retrospectively for annual periods beginning on or after 1 January 2017. -- IAS 28 Investments in Associates and Joint Ventures – A venture capital organisation, or other qualifying entity, may elect to measure Corporate Governance its investments in an associate or joint venture at fair value through profit or loss. This election can be made on an investment-by- investment basis. A non-investment entity investor may elect to retain the fair value accounting applied by an investment entity associate or investment entity joint venture to its subsidiaries. This election can be made separately for each investment entity associate or joint venture. Effective retrospectively for annual periods beginning on or after 1 January 2018; early application is permitted. The adoption of these amendments had no significant impact on the consolidated financial statements e) New standards, amendments and interpretations issued but not yet effective a) IFRS 9 Financial Instruments The Group will adopt IFRS 9 on 1 January 2018 and will not restate the comparative information. IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement and introduces new requirements for the classification and measurement of financial assets and financial liabilities, a new model based on expected credit losses for recognising loan loss provisions and provides for simplified hedge accounting by aligning hedge accounting more closely with an entity’s risk management methodology.
The Group has assessed the estimated impact on initial application of IFRS 9 as at 1 January 2018 on its consolidated financial Financial Statements statements as below: Retained Fair value earnings reserve
Closing balance under IAS 39/ IFRS 9 (2009) (31 December 2017) 2,280 - Impact on reclassification and re-measurements (a) Investment securities (debt) from FVTPL to those measured at fair value through other comprehensive income (a.1) 20 (20) 2,300 (20) Impact on recognition of Expected Credit Losses (b) Expected credit losses under IFRS 9 for due from banks and other receivables 77 - Expected credit losses under IFRS 9 for loan and advances at amortised cost including loan commitments and financial guarantees 3,667 Expected credit losses under IFRS 9 for debt securities at fair value through other comprehensive income - - 3,744 - Estimated adjusted opening balance under IFRS 9 on date of initial application of 1 January 2018 (1,444) (20)
43 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
2. BASIS OF PREPARATION (CONTINUED) e) New standards, amendments and interpretations issued but not yet effective (continued) This assessment is preliminary because the Bank is in the process of finalizing the transition work. The actual impact of adopting IFRS 9 on 1 January 2018 may change because: - IFRS 9 will require changes to the internal controls and these changes are in progress; - The process of testing and assessment of controls over its IT systems and changes to its governance framework are in progress; - Refining models for ECL calculations is in progress; and - the new accounting policies, assumptions, judgements and estimation techniques employed are subject to change until the Bank presents its first financial statements that include the date of initial application. (a.1) Classification and measurement IFRS 9 contains a new classification and measurement approach for financial assets that reflects the business model in which financial assets are managed and the underlying cash flow characteristics. IFRS 9 contains three principal classification categories for financial assets: (a) measured at Amortised Cost (AC), Fair Value through Other Comprehensive Income (FVTOCI) and Fair Value through Profit or Loss (FVTPL). Under IFRS 9, derivatives embedded in contracts where the host is a financial asset are no longer bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification. Based on the Group’s assessment, the new IFRS 9 classification requirements is expected to have a material impact on its accounting for debt securities as follows; At 31 December 2017, the Group had debt securities classified as fair value through profit or loss with a fair value of BD 6,012 thousands. Under IFRS 9 (2014), the Group has designated these investments as measured at fair value through other comprehensive income. Due to this reclassifcation, an increase of BD 20 thousands is estimated in the retained earnings along with a corresponding decrease in the fair value reserve due to reclassficiation of fair value loss. (a.2) Expected credit losses IFRS 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. The new impairment model will apply to financial assets measured at amortised cost or FVTOCI, except for investments in equity instruments. A number of significant judgements are also required in applying the accounting requirements for measuring ECL, such as: - Determining criteria for significant increase in credit risk (SICR); - Choosing appropriate models and assumptions for the measurement of ECL; - Establishing groups of similar financial assets for the purposes of measuring ECL; and - Establishing the number and relative weightings of forward-looking scenarios for each type of product/market and the associated ECL. (a.3) Financial liabilities Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. No significant changes are expected for financial liabilities in the consolidated financial statements. (a.4) Disclosure IFRS 9 also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature and extent of the Group’s disclosures about its financial instruments particularly in the year of the adoption of IFRS 9. b) IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. The Group has assessed that implemenation of the standard will not have a significant impact on its consolidated financial statements.
44 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
2. BASIS OF PREPARATION (CONTINUED) e) New standards, amendments and interpretations issued but not yet effective (continued) c) IFRS 16 Leases IFRS 16 introduces a single, on-balance lease sheet accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. Lessor accounting remains similar to the current standardi.e. lessors continue to classify leases as finance or operating leases. Strategic Report IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial application of IFRS 16. The Group has started an initial assessment of the potential impact on its consolidated financial statements. The Group has not yet decided whether it will use the optional exemptions. d) Long term interest in amounts and joint ventures An amendment to IAS 28 Investments in Associates and Joint Ventures will affect companies that finance such entities with preference shares or with loans for which repayment is not expected in the foreseeable future (referred to as long-term interests or ‘LTI’). The amendment, which addresses equity-accounted loss absorption by LTI, involves the dual application of IAS 28 and IFRS 9 Financial Instruments. Corporate Governance The amendment and accompanying example state that LTI are in the scope of both IFRS 9 and IAS 28 and explain the annual sequence in which both standards are to be applied. In effect, this is a three-step annual process: - Apply IFRS 9 independently - True up past allocations - Book current year equity share The amendment applies for annual periods beginning on or after 1 January 2019. Early adoption is permitted. There are transitional reliefs. The Company does not expect to have a significant impact on its financial statements.
3 CRITICAL JUDGMENTS AND ESTIMATES In preparing these consolidated financial statements, management has made judgments, estimates and assumptions that affect the application of the Group’s accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are Financial Statements recognized separately. The most significant areas requiring the use of management estimates and assumptions relate to: - economic useful lives of property, plant and equipment and investment property; - impairment losses on loans and islamic financing to customers; and - Financial asset classification Economic useful lives of property and equipment and investment property - The property, equipment and investment property are depreciated on a straight-line basis over their economic useful lives. - Useful economic lives are reviewed by management annually. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group. Impairment losses on loans and islamic financing to customers At each reporting date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets and that the loss event has an impact on the future cash flows of the assets that can be estimated reliably (refer note 4(d) (vi)).
45 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
3. CRITICAL JUDGMENTS AND ESTIMATES (CONTINUED) Financial asset classification Business model In making an assessment whether a business model’s objective is to hold assets in order to collect contractual cash flows, the Group considers at which level of its business activities such assessment should be made. Generally, a business model is a matter of fact which can be evidenced by the way business is managed and the information provided to management. However, in some circumstances it may not be clear whether a particular activity involves one business model with some infrequent asset sales or whether the anticipated sales indicate that there are two different business models. In determining whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows the Group considers: - management’s stated policies and objectives for the portfolio and the operation of those policies in practice; - how management evaluates the performance of the portfolio; - whether management’s strategy focuses on earning contractual interest revenues; - the degree of frequency of any expected asset sales; - the reason for any asset sales; and - whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. In particular, the Group exercises judgement to determine the objective of the business model for portfolios which are held for liquidity purposes. Debt securities are held by the Group in order to manage short-term liquidity. Sales from this portfolio are made to meet business requirements if needed. The Group determines that these securities are not held within a business model whose objective is to held assets in order to collect contractual cash flows. Contractual cash flows of financial assets The Group exercises judgement in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and interest on the principal outstanding and so may qualify for amortised cost measurement. In making the assessment the Group considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets, terms that change the amount and timing of cash flows and whether the contractual terms contain leverage. For financial assets in respect of which the Group’s claims are limited to specific assets of the debtor (non-recourse assets) the Group assess whether the contractual terms of such financial assets limit the cash flows in a manner inconsistent with those payments representing principal and interest.
4 SIGNIFICANT ACCOUNTING POLICIES The accounting policies used in the preparation of these consolidated financial statements are consistent with those used in previous year. a) Basis of consolidation i) Subsidiaries Subsidiaries’ are investees controlled by the Group. The Group ‘controls’ an investee if it is exposed to, or has rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. The Group reassesses whether it has control if there are changes to one or more of the elements of control. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date when control ceases. ii) Non-controlling interests NCI are measured at their appropriate share of the acquiree’s identifiable net assets at the date of the acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted as equity transactions. iii) Loss of control When the Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. iv) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses (except for foreign currency transaction gains or losses) arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment.
46 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) a) Basis of consolidation (continued) v) Investment in associates Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Interests in associates are accounted for using the equity method. They are initially recognised at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group’s share of the profit or loss and OCI of equity accounted investees, until the date on which significant influence ceases. When the Group’s share of losses exceeds its interest in Strategic Report an associate, the Group’s carrying amount is reduced to nil and recognition of further losses is discontinued except to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of an associate. b) Foreign currencies Transactions in foreign currencies are translated into the functional currency at the spot exchange rates at the date of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are translated into the functional currency at the spot exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between the amortised cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortised cost in the foreign currency translated at the spot exchange rate at the end of the year. Non-monetary assets and liabilities that are measured at fair value in a foreign currency are translated into the functional currency at the spot exchange rate at the date on which the fair value is determined. Non-monetary items that are measured based on historical cost in a foreign currency are translated using the spot exchange rate at the date of the transaction.
Foreign currency differences arising on translation are generally recognised in profit or loss. Corporate Governance c) Cash and cash equivalents Cash and cash equivalents includes notes and coins on hand, unrestricted balances held with central banks and highly liquid financial assets with original maturities of three months or less from the date of acquisition that are subject to insignificant risk of changes in their fair value, and are used by the Group in the management of its short term commitment. Cash and cash equivalents are carried at amortized cost in the statement of financial position. d) Financial assets and financial liabilities i) Recognition and initial measurement The Group initially recognises loans and advances and deposits on the date at which they are originated. All other financial assets and liabilities (including assets and liabilities designated at fair value through profit or loss) are initially recognised on the trade date at which the Group becomes a party to the contractual provisions of the instrument. A financial asset or financial liability is measured initially at fair value plus, for an item not at fair value through profit or loss, transaction
costs that are directly attributable to its acquisition or issue. Financial Statements ii) Classification Financial assets At inception a financial asset is classified as measured at amortised cost or fair value. A financial asset qualifies for amortised cost measurement only if it meets both of the following conditions: - the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. If a financial asset does not meet both of these conditions, then it is measured at fair value. The Group makes an assessment of a business model at a portfolio level as this reflects best the way the business is managed and information is provided to management. Financial assets held for trading are not held within a business model whose objective is to hold the asset in order to collect contractual cash flows. Financial liabilities The Group classifies its financial liabilities, other than guarantees and loan commitments, as measured at amortised cost. iii) Derecognition The Group derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Group neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset.
47 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d) Financial assets and financial liabilities (continued) Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Group is recognised as a separate asset or liability in the statement of financial position. On derecognition of a financial asset, the difference between the carrying amount of the asset (or the carrying amount allocated to the portion of the asset transferred), and consideration received (including any new asset obtained less any new liability assumed) is recognised in profit or loss. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. iv) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Group measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price – i.e. the fair value of the consideration given or received. If the Group determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, then the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument but no later than when the valuation is wholly supported by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, then the Group measures assets at a bid price and liabilities at an ask price. The Group recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change has occurred. v) Amortised cost measurement The ‘amortised cost’ of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. vi) Identification and measurement of impairment At each reporting date, the Group assesses whether there is objective evidence that financial assets not carried at fair value through profit or loss are impaired. A financial asset or a group of financial assets is impaired when objective evidence demonstrates that a loss event has occurred after the initial recognition of the assets and that the loss event has an impact on the future cash flows of the assets that can be estimated reliably. Objective evidence that financial assets are impaired includes: - significant financial difficulty of the borrower or issuer; - default or delinquency by a borrower; - the restructuring of a loan or advance by the Group on terms that the Group would not consider otherwise; - indications that a borrower or issuer will enter bankruptcy; - the disappearance of an active market for a security; or - observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults in the group. The Group considers evidence of impairment for loans and islamic financing to customers at both a specific asset and a collective level. All individually significant loans and and islamic financing to customers are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Loans and islamic financing to customers that are not individually significant are collectively assessed for impairment by grouping together loans and islamic financing to customers with similar risk characteristics.
48 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d) Financial assets and financial liabilities (continued) vi) Identification and measurement of impairment (continued) Impairment losses on assets measured at amortised cost are calculated as the difference between the carrying amount and the present value of estimated future cash flows discounted at the asset’s original effective interest rate.
Impairment losses are recognised in profit or loss and reflected in an allowance account against loans and islamic financing to customers. Strategic Report If an event occurring after the impairment causes the amount of impairment loss to decrease, then the decrease in impairment loss is reversed through profit or loss. vii) Loans and islamic financing to customers Loans and islamic financing to customers are non-derivative financial assets with fixed or determinable payments, other than investment securities, that are not held for trading. Subsequent to initial recognition loans and advances are measured at amortised cost using the effective interest method. viii) Investment securities Subsequent to initial recognition, investment securities are accounted for depending on their classification as either amortised cost, fair value through profit or loss or fair value through other comprehensive income. Investment securities are measured at amortised cost using the effective interest method, if: - they are held within a business model with an objective to hold assets in order to collect contractual cash flows and the contractual
terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest; and Corporate Governance - they have not been designated previously as measured at fair value through profit or loss. The Group elects to present changes in fair value of certain investments in equity instruments held for strategic purposes in other comprehensive income or at fair value through profit or loss. The election is irrevocable and is made on an instrument-by-instrument basis at initial recognition. Gains and losses on equity instruments at fair value in other comprehensive income are never reclassified to profit or loss and no impairment is recognised in profit or loss. Dividends are recognised in profit or loss unless they clearly represent a recovery of part of the cost of the investment, in which case they are recognised in other comprehensive income. Cumulative gains and losses recognised in other comprehensive income are transferred to retained earnings on disposal of an investment. Other investment securities are measured at fair value through profit or loss. ix) Derivatives In the ordinary course of business, the Bank enters into transactions that involve derivative financial instruments. A derivative financial instrument is a financial contract between two parties where payments are dependent upon movements in price in one or more Financial Statements underlying financial instrument, reference rate or index. Derivative financial instruments include forward exchange contracts. Forwards are contractual agreements to either buy or sell a specified currency, commodity or financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. e) Property and equipment i) Recognition and measurement Items of property and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. If significant parts of an item of property and equipment have different useful lives, then they are accounted for as separate items (major components) of property and equipment. Any gain or loss on disposal of an item of property and equipment (calculated as the difference between the net proceeds from disposal and the carrying amount of the item) is recognised within other income in profit or loss. ii) Subsequent costs Subsequent expenditure is capitalised only when it is probable that the future economic benefits of the expenditure will flow to the Group. Ongoing repairs and maintenance are expensed as incurred.
49 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e) Property and equipment (continued) iii) Depreciation Depreciation is calculated to write off the cost of items of property and equipment less their estimated residual values using the straight- line method over their estimated useful lives, and is generally recognised in profit or loss. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives of significant items of property and equipment are as follows: Buildings on freehold premises 15-30 years Furniture, fixtures, vehicles, computers and office equipment 3 – 5 years Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. iv) Reclassification to investment property When the use of a property changes from owner-occupied to investment property, the property is classified to investment property and carried at cost in line with accounting policy as per 4 (f). f) Investment property Investment properties are those which are held by the Group to earn rental income or for capital appreciation or both. Investment properties are stated at cost less accumulated depreciation and any impairment losses. Depreciation is calculated on cost by the straight- line method at annual rates which are intended to write off the cost of the investment property over their estimated useful lives of 30-40 years. Any gain or loss on disposal of investment property (calculated as the difference between the net process form the disposal and the carrying amount of the item) is recognized in profit or loss. g) Accounts receivable Accounts receivable are stated at original invoice amount net of discounts and provisions for any uncollectible amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when there is no possibility of recovery. h) Term loans Term loans are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. i) Deposits Deposits are initially measured at fair value minus incremental direct transaction costs, and subsequently measured at their amortised cost using the effective interest method. j) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. k) Employees’ end of service benefits Pension rights (and other social benefits) for Bahraini employees are covered by the General organisation for Social Insurance scheme to which employees and employers contribute monthly on a fixed-percentage-of-salaries basis. The Group’s share of contributions to this scheme, which is a defined contribution scheme under IAS 19 Employees Benefits, is recognised as an expense in the profit or loss. Expatriate employees are entitled to leaving indemnities payable under the Bahraini Labour Law for the Private Sector 2012, based on length of service and final remuneration. Provision for this, which is unfunded, and which represents a defined benefit plan under IAS 19Employees Benefits, has been made by calculating the notional liability had all employees left at the reporting date. The charge is recognised as an expense in the profit or loss. l) Income recognition Interest income and expense are recognised in profit or loss using the effective interest method. The ‘effective interest rate’ is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability (or, where appropriate, a shorter period) to the carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates future cash flows considering all contractual terms of the financial instrument, but not future credit losses.
50 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) l) Income recognition (continued) The calculation of the effective interest rate includes transaction costs and fees paid or received that are an integral part of the effective interest rate. Transaction costs include incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial liability.
Interest income and expense presented in the profit and loss include: Strategic Report - interest on financial assets and financial liabilities measured at amortised cost calculated on an effective interest basis; m) Dividend income Dividend income is recognised when the right to receive income is established. Usually, this is the ex-dividend date for quoted equity securities. n) Fee and commission income Fees and commission income and expense that are integral to the effective interest rate on a financial asset or financial liability are included in the measurement of the effective interest rate. Other fees and commission income – including account servicing fees, investment management fees, sales commission, placement fees and syndication fees – are recognised as the related services are performed. If a loan commitment is not expected to result in the draw- down of a loan, then the related loan commitment fees are recognised on a straight-line basis over the commitment period. Other fees and commission expense relate mainly to transaction and service fees, which are expensed as the services are received. Corporate Governance o) Rental income Rental income from investment property is recognised as revenue on a straight-line basis over the term of the lease. Lease incentives granted are recognised as an integral part of the total rental income, over the term of the lease. p) Other capital contribution This represents non-reciprocal contribution, has no interest and no repayment terms and will only be repaid on liquidation of the Bank and accordingly it has been classified as equity.
5 CASH AND BALANCES WITH CENTRAL BANK OF BAHRAIN
2017 2016 Cash in hand 183 337 Balances with Central Bank of Bahrain (CBB) 2,690 3,758
2,873 4,095 Financial Statements
6 PLACEMENTS WITH BANKS AND OTHER FINANCIAL INSTITUTIONS
2017 2016 Nostro balances 249 538 Placements with banks and other financial institutions 26,762 36,568 27,011 37,106 Nostro balances includes BD 0.1 thousand with islamic banks (2016: BD 68 thousands). Placements with banks and other financial institutions include placements of BD 13,081 thousands (2016: BD 16,539 thousands) with islamic financial institutions.
51 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
7 LOANS AND ISLAMIC FINANCING TO CUSTOMERS
2017 2016 Project finance - conventional 11,268 15,309 Project finance - islamic 114,841 130,859 Fisheries and agriculture 4,596 4,850 Ijara 534 527 Other loans 2,332 2,671 133,571 154,216 Less: Provision for impairment - Specific (18,096) (14,055) Less: Provision for impairment - Collective (940) (940) 114,535 139,221
Provision for impairment includes specific provision of BD 8,963 thousands (2016: 8,164 thousands) and collective provision of BD 812 thousands (2016: BD 801 thousands) against islamic financing to customers. Gross Non performing loans as per regulatory requirements are BD 30,595 thousands (2016: BD 25,656 thousands.) The Government of the Kingdom of Bahrain reimburses the Bank for any loan losses and costs in connection with fisheries and agricultural loans in the Kingdom of Bahrain. Tamkeen guarantees a percentage of the outstanding balance of loss islamic financing (depending on the agreement with tamkeen for respective loans) and 50% of the profit on islamic financing to customers in accordance with the agreement between the Bank and Tamkeen. Gross Non performing loans inculde BD13,560 thousands (2016: BD12,308 thousands) financed thorugh Tamkeen scheme. The movement in loan loss provisions during the year were as follows:
2017 2016 Specific Collective Specific Collective provision provision Total provision provision Total At 1 January 14,055 940 14,995 12,445 873 13,318 Charge for the year 8,152 - 8,152 1,904 67 1,971 Written off during the year (4,111) - (4,111) (294) - (294) Balance at 31 December 18,096 940 19,036 14,055 940 14,995
Gross amount of loans, individually assessed to be impaired before deducting any individually assessed impairment allowance (see note below) 30,595 25,656 Impaired non-performing loans includes BD 1,453 thousands (2016: BD 1,120 thousands) relating to agriculture and fishery loans which are considered as impaired but no provision has been made as these loans are secured through the reimbursement arrangement with the Government of Bahrain. The fair value of collateral that the Bank holds relating to loans individually determined to be impaired at 31 December 2017 amounts to BD 9,695 thousands (2016: BD 1,843 thousands). For more detailed description see note 26 (c) collateral and other credit enhancements.
52 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
8 INVESTMENT SECURITIES 2017 2016 Investment securities measured at fair value through profit or loss Conventional - Equities 5,508 5,222 - Debt - 2,165 Strategic Report Islamic - Equities 729 813 - Sukuk 6,012 6,020 12,249 14,220
2017 2016 Investment securities measured at amortised cost Conventional - Debt 2,894 - 2,894 - 15,143 14,220 Corporate Governance 9 INVESTMENT IN ASSOCIATES 2017 2016 EBDA Bank 238 238 Arabian Taxi Company 181 181 419 419
Place of business/ country of Proportion of Name of the entity incorporation ownership Principal activities Arabian Taxi Company Bahrain 20% Operating and managing taxi services EBDA Bank Bahrain 21.13% Providing microfinance and related advisory services
Associates are accounted for using the equity method in these consolidated financial statements. Financial Statements
53 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
10 INVESTMENT PROPERTY 2017 2016 At 1 January 12,264 12,685 Additions during the year 250 - Depreciation (481) (421) At 31 December 12,033 12,264
2017 2016 Cost: At 1 January 14,487 14,487 Additions during the year 250 - At 31 December 14,737 14,487 Depreciation: At 1 January 2,223 1,802 Charge for the year 481 421 At 31 December 2,704 2,223 Net book values At 31 December 12,033 12,264 Investment properties includes two incubator buildings at a net book value of BD 8,840 thousands (Level 3: fair value BD 9,051 thousands). During 2014, a majority shareholder transferred a commercial property to the Bank for fifty years at a nominal lease payment. This property is leased to third parties. The property has fair value of BD 5,281 thousands (2016: BD 5,977 thousands) as determined by an external, independent property valuer, having appropriate recognized professional qualifications and recent experience in the location and category of the property being valued. The fair value measurement of the investment properties has been categorized as a level 3 fair value based on the inputs to the valuation technique used. The discounted cash flows model considers the present value of net cash flows to be generated from the property, taking into account the expected rental growth rate, void periods, occupancy rate, lease incentive costs such as rent-free periods and other costs not paid by tenants. The expected net cash flows are discounted using risk-adjusted discounted rates. Among other factors, the discount rate estimation considers quality of a building and its location, tenant credit quality and lease terms.
54 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
11 PROPERTY AND EQUIPMENT Furniture, fixtures, vehicles computers Freehold Freehold and office 2017 land premises equipment Total Strategic Report
Cost: At 1January 2017 293 1,809 2,736 4,838 Additions - - 412 412 Disposals - - (213) (213) At 31 December 2017 293 1,809 2,935 5,037
Depreciation: At 1January 2017 - 1,337 2,259 3,596 Charge for the year - 55 383 438 Disposals - - (213) (213) Corporate Governance At 31 December 2017 - 1,392 2,429 3,821 Net book values At 31 December 2017 293 417 506 1,216
Furniture, fixtures, vehicles computers Freehold Freehold and office 2016 land premises equipment Total
Cost: At 1January 2016 293 1,809 2,476 4,578 Financial Statements Additions - - 269 269 Disposals - - (9) (9) At 31 December 2016 293 1,809 2,736 4,838
Depreciation: At 1January 2016 - 1,282 1,974 3,256 Charge for the year - 55 289 344 Disposals - - (4) (4) At 31 December 2016 - 1,337 2,259 3,596 Net book values At 31 December 2016 293 472 477 1,242
55 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
12 OTHER ASSETS
2017 2016 Interest receivable 138 206 Receivable from Ministry of Finance 215 218 Receivable from Ministry of Municipalities 1,159 996 Rent and other account receivables (net of provision) 831 929 Prepayments and other assets 597 417 2,940 2,766
13 TERM LOANS
2017 2016 Kuwait Fund for Arab Economic Development 2,608 3,829 Saudi Fund for Development 9,029 9,531 Arab Fund for Economic and Social Development 40,037 42,790 51,674 56,150
At 1 Jan 2017 56,150 Loan drawn down - Repayment of loans (4,476) At 31 Dec 2017 51,674 Kuwait Fund for Arab Economic Development (KFAED) The Bank had obtained a loan from Kuwait Fund for Arab Economic Development (KFAED) in 1998. The entire facility has been drawn down and is repayable in thirty equal half yearly installments, which commenced from 15 May 2005. This bears an interest and management fees of 1.5% and 0.5% (2016: 1.5% and 0.5%) respectively. The Ministry of Finance is a guarantor to the loan. The loan proceeds were utilised by the Bank to advance loans to customers. One of the covenants of KFAED’s loan agreement requires the Bank to repay KFAED any margin earned in excess of a spread of 4% ("interest differentials") on such loans to customers. The interest differentials are deposited into KFAED’s bank account maintained by the Bank in a fiduciary capacity. The balance at year end was BD 6 thousands (2016: BD 6 thousands). This account can be used only for development activities such as training, feasibility studies and technical assistance to borrowers agreed by both the parties. During 2017, no amount was utilised for such purposes (2016: nil). Saudi Fund for Development During 2012, the Bank obtained a loan of SAR 100 million from Saudi Fund for Development. The facility has been fully availed and is repayable semiannually in 25 years (5 years grace period for principal) at an interest of 2.0%. The Ministry of Finance is a guarantor to the loan. Arab Fund for Economic and Social Development During 2013, the Bank had obtained a loan of USD 30 million from Arab Fund for Economic and Social Development . The facility has been fully availed and is repayable semiannually in 10 years (3 years grace period for principal) at an interest of 3.0%. During 2014, the Bank had obtained a second loan of USD 50 million from Arab Fund for Economic and Social Development.The facility has been fully availed and is repayable semiannually in 10 years (3 years grace period for principal) at an interest of 3.0%. During 2016, the Bank had obtained a third loan of USD 50 million from Arab Fund for Economic and Social Development.The Bank recevied USD 37.5 million during 2016 and is repayable semiannually in 10 years (3 years grace period for principal) at an interest of 3.0%.
56 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
14 DEPOSITS
2017 2016 Deposits from banks 11,356 10,675 Deposits from customers 35,084 58,541
46,440 69,216 Strategic Report Deposits from banks include BD 3,701 thousands (2016: BD 7,470 thousands) from islamic banks placed with BDB on a wakala basis. Deposits from customer includes BD 1,729 thousands (2016: BD 1,486 thousands) kept as margin deposit.
15 OTHER LIABILITIES
2017 2016 Staff related accruals 997 1,066 Employees saving scheme 1,836 2,143 Accounts payable 852 887 Interest payable 440 724 Accrued expenses 801 430 Corporate Governance Others 445 356 5,371 5,606
Accounts payable include charity account from the islamic financing deals of BD 18 thousands (2016: BD 16 thousands).
16 SHARE CAPITAL Authorised Issued and fully paid 2017 2016 2017 2016 Ordinary shares of BD 1 each 100,000 100,000 65,000 65,000
The percentage of shareholding is as below:
Number of Percentage Name of shareholder shares of holding Financial Statements Ministry of Finance (Parent) 58,333,333 89.74% General Organisation For Social Insurance 3,333,333 5.13% Pension Fund Commission 3,333,334 5.13% 65,000,000 100.00%
17 STATUTORY RESERVE AND RETAINED EARNINGS In accordance with the provisions of the Bahrain Commercial Companies Law and the Bank’s articles of association, an amount equivalent to 10% of the net profit for the year is transferred to the statutory reserve. The Bank may resolve to discontinue such annual transfers when the reserve totals 50% of the paid up share capital. This reserve is not distributable, but can be utlised for the purposes of a distribution in such circumstances as stipulated in the Bahrain Commercial Companies Law and following the approval of the Central Bank of Bahrain.
18 OTHER CAPITAL CONTRIBUTION Other capital contribution includes a contribution during 2014 by a majority shareholder for a non-monetary asset in the form of a commercial property to the Bank. The property has been classified as an investment property (refer note 10) at its fair value on the date of transfer and as a capital contirbution in the equity of BD 3,623 thousands.
57 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
19 INTEREST AND ISLAMIC FINANCING INCOME 2017 2016 Interest on conventional loans 672 1,088 Profit on islamic financing 7,392 8,548 Profit and Interest on placements 618 389 Profit and Interest on securities 322 246 9,004 10,271 Interest on placements and securities includes profit from placements and securities with islamic banks of BD 618 thousands (2016: BD 463 thousands).
20 INTEREST AND ISLAMIC FINANCING EXPENSE
2017 2016 Interest on term loans 1,502 1,353 Interest on conventional deposits from customers 708 822 Interest on deposits from conventional banks 12 25 Wakala expense 81 75 2,303 2,275
21 INVESTMENT INCOME
2017 2016 Changes in fair value of FVTPL investments 60 (326) Gain on sale of investments - 15 Dividend income from equity securities 117 89 177 (222)
22 OTHER INCOME
2017 2016 Rental income 2,005 1,814 Miscellaneous income 526 203 2,531 2,017
23 CASH AND CASH EQUIVALENTS Cash and cash equivalents included in the consolidated statement of cash flows comprise the following:
2017 2016 Cash in hand 183 337 Balances with Central Bank of Bahrain (excluding reserves) 1,137 1,079 Due from banks and other financial institutions with original maturity of 90 days or less 15,204 23,563 16,524 24,979
58 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
24 RELATED PARTY TRANSACTIONS The Group enters into transactions with related parties which comprise major shareholders, associates, directors, senior management and entities controlled jointly or significantly influenced by such related parties in the ordinary course of business at commercial interest and commission rates. The year end balances in respect of related parties included in the consolidated financial statements are as follows:
Directors Other Strategic Report and senior related Subsidiaries management companies Total 2017 Deposits 589 24 7,577 8,190 Islamic financing and loans to customers 4,594 239 79 4,912 Other assets 2 - 215 217
Directors Other and senior related Subsidiaries management companies Total 2016
Deposits 730 25 7,526 8,281 Corporate Governance Islamic financing and loans to customers 4,796 392 784 5,972 Other assets - - 236 236
The Bank has provided an overdraft facility to its associate for meeting its operational expenses. The outstanding balance as at the reporting date is BD 599 thousands (2016: BD 443 thousands). The overdraft has been fully provided for. Subsequent to the year end, the Group has written off BD 500 thousands of loan to an associate. There is no impact on the income statement as the loan was fully provided for. The income and expenses in respect of related parties included in the consolidated financial statements are as follows:
Directors Other and senior related Subsidiaries management companies Total
2017 Financial Statements Profit and interest income 95 16 5 116 Interest expense - - 58 58 Other expenses 65 - 108 173 Other income 6 - - 6
Directors Other and senior related Subsidiaries management companies Total 2016 Profit and interest income 99 22 33 154 Interest expense - - 51 51 Other expenses 65 5 217 287 Other income 7 - 1 8
59 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
24 RELATED PARTY TRANSACTIONS (CONTINUED) Compensation of key management personnel is as follows:
2017 2016 Board Remuneration 80 72 Salary & short term employee benefits 887 1,008 Termination benefits 113 222 1,080 1,302
25 CONTINGENT LIABILITIES AND COMMITMENTS The Bank issues letters of credit and guarantees to its existing customers. These instruments commit the Bank to make payments on behalf of customers in the event of a specific act, generally related to the import of goods. Irrevocable commitments to extend credit are the loans and advances which had been approved by the Bank but had not been disbursed as of year-end.
Details of contingent liabilities and commitments are given below:
2017 2016 Contingent liabilities: Letters of guarantee 3,487 4,595 Letters of credit 191 89 3,678 4,684 Commitments: Irrevocable commitments to extend credit 6,223 6,793 Commitment to invest in equity 3,770 1,500 Lease rental commitments 435 518 10,428 8,811 14,106 13,495
Lease rental commitments include lease rental payable on the land leased from Ministry of Industry and Commerce which is as follows:
2017 2016 Future minimum lease payments: Within one year 79 88 Later than 1 year but not later than 5 years 238 247 Later than 5 years 118 183 435 518
26 RISK MANAGEMENT STRUCTURE Risk is inherent in the Bank's activities but is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. In the course of its regular business, the Bank gets exposed to multiple risks notably credit risk, liquidity risk, market risk, operational risk and other risks like compliance risk, strategic risks and reputational risks. A well-established risk governance and ownership structure ensures oversight and accountability of the effective management of risk at the Bank. The Bank’s risk governance is manifested in a set of established policies, procedures and controls through which the existing organizational structure meets its strategic targets. This philosophy revolves around the knowledge of various risks and their willingness to accept the same commensurating with their risk appetite and strategic plan approved by the Board of Directors.
60 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) Organizational structure A cohesive organizational structure is established within the Bank in order to identify, assess, monitor, and mitigate risks. Board of directors The Board of Directors ("BOD") is responsible for the overall direction, supervision and control of the Bank. Oversight of the day-to- day management of the Bank is conducted by the BOD committees, the Chairman and the Chief Executive Officer ("CEO"). The BOD Strategic Report has overall responsibility for the Bank including approving and overseeing the implementation of its strategic objectives, risk strategy, corporate governance and corporate values within the agreed framework in accordance with relevant statutory and regulatory structures. The BOD currently comprises eight members. Audit Committee of the Board The Audit Committee ("AC") comprises three members of the Board and the Head of Internal Audit is the committee's Secretary. This Committee is principally responsible for reviewing the internal audit program and assist the Board of Directors in carrying out its duties regarding the integrity of the Bank's financial reporting system, adequacy of the Bank's internal control and risk management processes, to oversee the external and internal audit functions, and the Bank's compliance with legal and regulatory requirements. Remuneration & Governance Committee of the Board The Remuneration & Governance Committee ("RGC") comprises three members of the BOD (including the Chairman) and the Head of Human Resources & Corporate Communications is the committee's Secretary. RGC has the overall responsibility of setting the criteria and processes for identification of candidates for the Board level committees and senior management. The Committee also assists the Board of Directors in establishing a fair and transparent process for the remuneration of directors, other Board Committees and the Chief Executive Officer and of the Executive Management. The Committee approves and oversees reward design and ensures that the reward Corporate Governance is appropriate and consistent with the Bank's culture, business and risk strategy, performance as well as with any legal or regulatory requirements. RGC also overseas the Bank's HR policies and rewards policy framework, corporate governance practices. Investment & Credit Committee of the Board The Investment & Credit Committee ("ICC") comprises four members of the BOD. The Committee has overall responsibility of setting the criteria for managing credit and investment risks and oversee the investment and credit strategies and objectives of the Bank. The Committee assists the Board of Directors in managing credit risk and reviews internal credit policies, grants approvals for credit and investment facilities in addition to reviewing the quality and performance of the Bank's lending portfolio and investment in line with the agreed risk appetite and best credit risk management practices. Risk Committee of the Board The Risk Committee ("RC") comprises three members of the BOD. The Committee has overall responsibility of overseeing the Bank’s enterprise risk management framework, approach and pertinent policies. The Committee recommends to the Board, guidelines in relation to the Bank’s current and potential future risk exposures and risk strategy, determination of risk appetite including risk limits and tolerance levels as well as the Bank’s capital and liquidity strategy. Financial Statements Executive Management Executive Management is responsible for the day to day operations towards achieving the strategic goals within the pre-defined risk appetite and approved strategy as a whole. Management Executive Committee The Management Executive Committee ("MEC") is a senior management level committee that has been entrusted with the role of supporting the CEO to determine and implement the Bank's strategic plan as approved by the BOD. The responsibilities of MEC include approving and monitoring the Bank’s various business activities in accordance with the strategic plan approved by the Board. In order to fulfill its responsibilities, the Committee has appointed other Sub-Committees and delegated specific tasks and adequate powers and authorities for effectively and efficiently carrying out the responsibilities assigned to them. The composition, guiding principles and detailed roles and responsibilities of MEC are covered in the MEC’s charter. Risk Executive Committee The Risk Executive Committee ("REC") has the primary responsibility of overseeing the Bank’s activities in managing credit risk, market risk, liquidity risk, operational risk, legal risk and other risks. REC has to ensure that the Bank has adequate risk management framework, policies, procedures and processes in place in order to identify, measure, monitor, mitigate and manage risks across all of its operations. Asset and Liability Committee The Assets and Liabilities Committee (“ALCO”) is mainly responsible for defining long-term strategic plans and short-term tactical initiatives for directing asset and liability allocation prudently for the achievement of the Bank’s strategic goals. ALCO monitors the Bank’s liquidity and market risks and the Bank’s risk profile in the context of economic developments and market fluctuations, to ensure that the Bank’s ongoing activities are compatible with the risk / reward guidelines approved by the Delegated Approval Authority / Board.
61 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) Credit Committee The Credit Committee ("CC") has the responsibility to grant / approve credit facilities as within their Delegated Authority and also makes decisions relating to the execution of investments in line with the Banks investment strategy and management of credit and concentration risks. Proposals exceeding their Delegated Authority are escalated to the ICC for consideration. Risk management Risk Management Department is an independent function responsible for the preparation, implementation and updating the policies and procedures within the framework of the Bank's strategy and in line with the guidelines of the Central Bank of Bahrain. They are also responsible for the identification and continuous evaluation of all significant risks, design and implementation of appropriate internal controls to mitigate the risks and the processes involved in the remedial function. The risk management department is overseen by the Chief Risk Officer. Legal The Bank has engaged a panel of external legal counsels to handle all legal cases initiated for recovery of difficult loan cases. The progress and outcomes on such cases are monitored by the Risk Executive Committee. Internal audit Risk Management processes are audited annually by Internal Audit, which examines the adequacy of the controls in place in addition to compliance with the policies by the respective departments. The Internal Audit results are discussed with the Executive Management Committee and the findings, together with recommendations, to mitigate the findings are presented to the Audit Committee of the Board. Treasury The Treasury Department is responsible for the day to day operations necessary to fund banking activities and implement ALCO’s strategies in managing / optimizing interest rate and liquidity risks. Risk Measurement and Reporting Systems Monitoring and controlling risks is primarily performed based on the approved limits and the strong internal control structures established by the Board. The limits reflect the business strategy and the market environment in which the Bank operates as well as the level of risk that the Bank is willing to accept. Strict assessment processes are factored during the review and approval processes. In addition, the Bank monitors and measures the overall risk bearing capacity in relation to the aggregate risk exposure across all risk types and activities. Specifically tailored risk reports are prepared and distributed to ensure that all business divisions have access to extensive, necessary and up-to-date information. Quarterly updates are provided to the Board of Directors and on a monthly basis to all other members of the management on the utilization of market limits, proprietary investments, liquidity and other developments. Risk Mitigation Significant risk mitigation activities are focused in the credit area. Risk mitigation process comprise of an appropriate and adequate structure for the credit facilities at the initial stage followed by ongoing and regular monitoring, enforceable documentation and collateral. (i) Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s loans and islamic financing to customers, placements and debt securities. Limits and concentrations Limits are assigned for each individual counterparty group and for each industrial segment. The Bank also monitors credit exposures, and continually assesses the creditworthiness of counterparties to the transactions. In addition, the Bank obtains security, where appropriate, enters into master netting agreements and collateral arrangements with counterparties, and limits the duration of exposures. Concentrations arise when a number of counterparties are engaged in similar business activities, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location. In order to avoid excessive concentrations of risk, the Bank’s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. External credit assessment The Bank does not use any external credit assessment institutions and the risk rating for the exposures are based on the internal credit framework and policy guidelines of the Bank.
62 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) Classification Exposures are classified as “Non-performing” when interest or principal repayments are past due for over 90 days. Non performing exposures are further classified into sub-standard, doubtful and loss. (a) Maximum exposure to credit risk without taking account of any collateral The table below shows the maximum exposure to credit risk as at reporting date Strategic Report
2017 2016 Balances with Central Bank of Bahrain 2,690 3,758 Placement with banks and other financial institutions 27,011 37,106 Islamic financing and loans to customers 114,535 139,221 Investment securities 8,906 8,185 Other assets 2,343 2,349 155,485 190,619 Contingent liabilities 3,678 4,684 Commitments 9,993 8,293
13,671 12,977 Corporate Governance Maximum credit risk exposure 169,156 203,596
(b) Concentration of credit risk Since the Group's operations are restricted only to the Kingdom of Bahrain, it is primarily effected by the changes in the economic and other conditions prevailing in the Kingdom of Bahrain.
2017 2016 Industry sector Banks and financial institutions 38,607 49,049 Trading and manufacturing 53,418 72,292 Education and health 9,308 8,840 Hospitality, media and transportation 4,156 11,814 Financial Statements Fisheries, agriculture & dairy 5,209 5,701 Food processing 4,937 6,961 Others 53,521 48,939 169,156 203,596 (c) Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the facility structure and the associated credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are cash margin, bank guarantees and real estate title deeds. Market value of collateral is closely monitored by the Bank in addition to requesting additional collateral in accordance with the underlying agreement and evaluation of the adequacy of the allowance for impairment. It is the Bank’s policy to normally dispose of repossessed collateral in an orderly fashion after due notice has been provided to the defaulting customer. The proceeds are used to reduce or settle the outstanding claim. The Bank did not occupy repossessed properties for its own business use, as at the reporting date. (d) Credit quality per class of financial assets The credit quality of financial assets is managed by the Bank using internal credit ratings. The table below shows the credit quality for balance sheet lines, based on the Bank’s credit rating system.
63 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) (d) Credit quality per class of financial assets (continued) 2017 Neither past due nor impaired Past due High Standard but not grade grade impaired Impaired Total Cash and balances with Central Bank of Bahrain 2,690 - - - 2,690 Placement with banks and other financial institutions 27,011 - - - 27,011 Islamic financing and loans to customers - 87,031 17,731 9,773 114,535 Investment securities 8,906 - - - 8,906 Other assets 1,507 424 337 75 2,343 Total 40,114 87,455 18,068 9,848 155,485
2016 Neither past due nor impaired Past due High Standard but not grade grade impaired Impaired Total Cash and balances with Central Bank of Bahrain 3,758 - - - 3,758 Placement with banks and other financial institutions 37,106 - - - 37,106 Islamic financing and loans to customers - 100,958 28,505 9,758 139,221 Investment securities 8,185 - - - 8,185 Other assets 1,334 491 178 346 2,349 Total 50,383 101,449 28,683 10,104 190,619 The impaired loans does not include BD 1,272 thousand (2016: BD 723) with past dues of over 90 days, classified as non performing and interest/profit has been suspended, for which provision for impairment is not considered necessary on the basis of subsequent collections, level of collateral available and or stage of collections of amounts owed to the Bank; and BD 1,454 thousand (2016: BD 1,120) relating to agriculture and fisheries, which are guaranteed by the Government of Bahrain. Of the total amount of gross past due but not impaired loans and islamic financing to customers, the fair value of collateral that the Bank held as at 31 December 2017 was BD 7,385 thousands (2016: BD 13,434 thousands). (e) Ageing analysis of past due but not impaired of financial assets In accordance with the Bank's policy and the Central Bank of Bahrain guidelines, loans on which payments of interest or repayments of principal are 90 days past due, are defined as non-performing. The following is the ageing schedule of past due but not impaired loans and other assets. The table shows the time period since the date of last repayment of principal or interest by the customer.
As at December 2017 2016 Up to 3 months 15,482 27,196 Over 3 months to 1 year 1,821 795 1 to 3 years 657 513 Over 3 years 108 179 18,068 28,683 This includes BD 2,170 thousands (2016: BD 2,252 thousands) relating to agriculture and fishery loans which are non performing but no provision has been made as these loans are considered secured through the reimbursement arrangement with the Government of Bahrain.
64 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) (f) Carrying amount per class of financial assets whose terms have been renegotiated The table below shows the carrying amount for renegotiated financial assets during the year
2017 2016
Loans and islamic financing to customers 1,409 6,909 Strategic Report Where possible, the Bank seeks to restructure loans rather than to take ownership of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to impairment assessment, calculated using the loan’s original effective interest rate. (ii) Market risk Market risk is the risk of loss attributable to adverse changes in the values of financial instruments, whether on-or off- balance sheet, as a result of changes in market rates (such as interest rates and foreign exchange rates) or price. (a) Interest rate risk Interest rate risk arises from the possibility that changes the interest rates will affect future profitability or the fair values of the financial instruments. The Bank is exposed to interest rate risks due to mismatches of interest rate repricing of assets and liabilities. Positions are monitored periodically to ensure that this is maintained within the established limits. Net interest income sensitivity Corporate Governance The Bank's interest sensitive financial instruments are denominated predominantly in Bahraini Dinars, Kuwaiti Dinars, Saudi Riyals and United States Dollars. The following table demonstrates the Bank's sensitivity to a reasonable possible change in interest rates, with all other variables held constant.
Impact of Change change Change Impact of change in basis on Net interest in basis on Net interest points Income (BHD) points Income (BHD) 2017 2016 2017 2016 Bahraini Dinars +100 1,007 1,059 -100 (1,007) (1,059) Kuwaiti Dinars +100 1 2 -100 (1) (2) Saudi Riyals +100 1 1 -100 (1) (1) United States Dollars +100 (52) (3) -100 52 3 Financial Statements
(b) Currency risk Currency risk is the risk that the value of the financial instrument will fluctuate due to changes in foreign exchange rates. Net open positions are monitored on a daily basis to ensure compliance within the established limits. The Bank primarily deals with 4 currencies, namely Bahraini Dinars, Kuwaiti Dinars, Saudi Riyals and United States Dollars. The Bank views the Bahraini Dinar as its functional currency. In the opinion of the Bank's management, the currency risk for any position held in US dollar is insignificant since the Bahraini Dinar is pegged to the US dollar. The Bank had the following significant net open exposures denominated in foreign currencies as of 31 December 2017 and 31 December 2016:
Equivalent long (short) 2017 2016 Kuwaiti Dinars 153 166 US Dollars 91 (137) Euro 6 4 GBP 6 2 Saudi Riyals 26 58 UAE Dirhams 21 7
65 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) (ii) Market risk (continued) (c) Maturity analysis of assets and liabilities The table below summarises the maturity profile of the Group’s assets and liabilities as at 31 December 2017 and 31 December 2016 based on expected maturities.
Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over 3 Carrying month months months to 1 year years years Total amount 2017 Assets Cash and balances with Central Bank of Bahrain 2,873 - - - - - 2,873 2,873 Placements with banks and other financial institutions 16,310 3,630 7,071 - - - 27,011 27,011 Islamic financing and loans to customers 4,849 8,099 11,946 21,955 75,684 12,260 134,793 114,535 Investment securities 716 - - 2,894 - 11,533 15,143 15,143 Investment in associates - - - - - 419 419 419 Investment property - - - - - 12,033 12,033 12,033 Property and equipment - - - - - 1,216 1,216 1,216 Other assets - - 2,940 - - - 2,940 2,940 Total assets 24,748 11,729 21,957 24,849 75,684 37,461 196,428 176,170 Liabilities Term loans - 251 2,635 2,886 15,307 30,595 51,674 51,674 Deposits 30,709 4,962 7,810 2,907 52 - 46,440 46,440 Other liabilities - - 5,371 - - - 5,371 5,371
Total liabilities 30,709 5,213 15,816 5,793 15,359 30,595 103,485 103,485 Net liquidity gap (5,961) 6,516 6,141 19,056 60,325 6,866 Cumulative liquidity gap - 555 6,696 25,752 86,077 92,943
66 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) (c) Maturity analysis of assets and liabilities (continued) Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over 3 Carrying 2016 month months months to 1 year years years Total amount Assets
Cash and balances with Central Bank of Bahrain 4,095 - - - - - 4,095 4,095 Strategic Report Placements with banks and other financial institutions 25,237 905 10,964 - - - 37,106 37,106 Islamic financing and loans to customers 2,887 955 1,615 3,618 35,000 95,146 139,221 139,221 Investment securities 8,185 - - - - 6,035 14,220 14,220 Investment in associates - - - - - 419 419 419 Investment property - - - - - 12,264 12,264 12,264 Property, plant and equipment - - - - - 1,242 1,242 1,242 Other assets - - 2,766 - - - 2,766 2,766 Total assets 40,404 1,860 15,345 3,618 35,000 115,106 211,333 211,333 Liabilities Corporate Governance Term loans - 251 1,391 2,899 14,091 37,518 56,150 56,150 Deposits 33,354 23,116 9,697 3,049 - - 69,216 69,216 Accounts payable and other liabilities - - 5,606 - - - 5,606 5,606 Total liabilities 33,354 23,367 16,694 5,948 14,091 37,518 130,972 130,972 Net liquidity gap 7,050 (21,507) (1,349) (2,330) 20,909 77,588 Cumulative liquidity gap - (14,457) (15,806) (18,136) 2,773 80,361 In 2016, maturity for loans is computed based on the final contractual maturity of the loan and not based on the loan repayment schedule. (iii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The table below summarises the maturity profile of the Bank’s financial liabilities at 31 December 2017 and 31 December 2016 based on contractual undiscounted repayment obligations. See note (c) ‘Maturity analysis of assets and liabilities’ for the expected maturities Financial Statements of these liabilities.
On Up to 1 1 to 3 3 to 6 6 months 1 to 3 Over demand month months months to 1 year years 3 years Total 2017 Deposits 19,576 11,133 4,962 7,810 2,907 52 - 46,440 Other liabilities - - 5,371 - - - - 5,371 Term loans - - 342 3,262 3,565 17,525 33,197 57,891 Total liabilities 19,576 11,133 10,675 11,072 6,472 17,577 33,197 109,702 2016 Deposits 23,517 9,904 23,224 9,979 3,122 - - 69,746 Other liabilities - - 5,606 - - - - 5,606 Term loans - - 347 2,065 3,654 16,705 41,100 63,871 Total liabilities 23,517 9,904 29,177 12,044 6,776 16,705 41,100 139,223
67 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
26 RISK MANAGEMENT STRUCTURE (CONTINUED) (c) Maturity analysis of assets and liabilities (continued) (iii) Liquidity risk (continued) The table below shows the contractual expiry by maturity of the Bank’s contingent liabilities and commitments.
On Less than 3 to 12 1 to 5 demand 3 months months years Total 2017 Contingent liabilities 402 120 2,364 792 3,678 Commitments 6,223 - 3,849 356 10,428 Total 6,625 120 6,213 1,148 14,106 2016 Contingent liabilities 453 1,772 1,856 603 4,684 Commitments 8,293 - 88 430 8,811 Total 8,746 1,772 1,944 1,033 13,495 The Bank expects that not all of the commitments will be drawn before expiry of the commitments. (iv) Legal risk and claims Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments can disrupt or otherwise negatively affect the operations of the Group. The Group has developed controls and procedures to identify legal risks and believes that losses, if any will not be material.
27 DERIVATIVES The Group has entered into forex forward contracts with Central Bank of Bahrain with nominal value of BD 34,284 thousands (2016: BD 35,944 thousands).
28 FAIR VALUE DISCLOSURES Fair value' is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or in its absence, the most advantageous market to which the Group has access at that date. The fair value of a liability reflects its non-performance of risk. Underlying the definition of fair value is a presumption that an enterprise is a going concern without any intention or need to liquidate, curtail materially the scale of its operations or undertake a transaction on adverse terms. The fair values of financial assets and financial liabilities carried at amortised cost approximate the carrying values as at the reporting date due to their short term nature. Term loans obtained by the Bank are from Development Funds in Kuwait and Kingdom of Saudi Arabia. There is no secondary market for such loans which are at lower than market rates due to the nature of these loans. The Bank has estimated that its financing rates and terms are comparable to that of objectives of other similar development banks in the region and accordingly believes the carrying value of term loans obtained are a close approximation of their fair values. Fair value of deposits approximates the carrying value as at the reporting date given their short term nature. The Group measures fair values using the following fair value hierarchy that reflects the significance of the inputs used in making the measurements: Level 1: Quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: inputs other than quoted prices included within Level 1 that are observable either directly (i.e. as prices) or indirectly (i.e. derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data. Level 3: inputs that are unobservable. This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument’s valuation. This category includes instruments that are valued based on quoted prices for similar instruments for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments.
68 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
28 FAIR VALUE DISCLOSURES (CONTINUED) Total Total fair carrying Level 1 Level 2 Level 3 value value 2017
Financial instruments measured at fair value Strategic Report Financial assets Equity securities 153 576 5,508 6,237 6,237 Debt securities 6,012 - - 6,012 6,012 Forward Contracts - 34,284 - 34,284 34,284 Financial instruments not measured at fair value Financial assets Cash and balances with Central Bank of Bahrain - 2,873 - 2,873 2,873 Placement with banks and other financial institutions - 27,011 - 27,011 27,011 Islamic financing and loans to customers - - 114,535 114,535 114,535 Debt Securities - 2,894 - - - Corporate Governance Financial liabilities Term loans - - 51,674 51,674 51,674 Deposits - 46,440 - 46,440 46,440
Total Total fair carrying Level 1 Level 2 Level 3 value value 2016 Financial instruments measured at fair value Financial assets Equity securities 142 671 5,222 6,035 6,035
Debt securities 6,020 2,165 - 8,185 8,185 Financial Statements Forward Contracts - 35,944 - 35,944 35,944 Financial instruments not measured at fair value Financial assets Cash and balances with Central Bank of Bahrain - 4,095 - 4,095 4,095 Placement with banks and other financial institutions - 37,106 - 37,106 37,106 Loans and islamic financing to customers - - 139,221 139,221 139,221 Financial liabilities Term loans - - 56,150 56,150 56,150 Deposits - 69,216 - 69,216 69,216 Sensitivity Analysis Investments at fair value through profit or loss comprises investments in private equity entities and funds. The main principles, estimates and assumptions adopted to arrive at fair value include estimated future cash flows which have been provided by the management of the investee companies but have been reviewed for reasonableness by the Group and the external valuer. Cash flows have been projected for an initial period of five years or over the project life in certain cases and then a terminal value has been estimated at a growth rate of 2% to 3%.
69 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
28 FAIR VALUE DISCLOSURES (CONTINUED) Sensitivity Analysis (continued) The potential effect of using reasonable possible alternative assumptions for fair valuing the investments at fair value through profit or loss are summarised below:
Key Fair value at Reasonable Reasonable unobservable 31 December possible shift possible shift Valuation technique used inputs 2017 +/-(in any input) +/-(in any input) Discounted cash flow Discount rate +/- 0.5% (51) / 56 3,103 Growth rate +/- 0.5% 62 / (57) Adjusted Net Assets Value NAV 2,271 +/- 5% 103 / (103) Market multiples P/E Multiple 576 +/- 5% 29 / (29)
Key Fair value at Reasonable Reasonable unobservable 31 December possible shift possible shift Valuation technique used inputs 2016 +/-(in any input) +/-(in any input) Discounted cash flow Discount rate +/- 0.5% 649 / (270) 4,412 Growth rate +/- 0.5% 224 / (449) Adjusted Net Assets Value NAV 810 +/- 5% 48 / (48) Market multiples P/E Multiple 671 +/- 5% 34 / (34)
29 CAPITAL ADEQUACY The risk asset ratio, calculated in accordance with the capital adequacy guidelines approved by the Central Bank of Bahrain, for the Bank is as follows:
2017 2016 Capital base Tier 1 capital 72,695 80,355 Tier 2 capital 940 940 Total capital base (a) 73,635 81,295 Risk-weighted assets (b) 185,028 210,552 Capital adequacy ratio (a/b*100) 39.80% 38.61% Minimum requirement 12.5% 12.5% The Central Bank of Bahrain (CBB) sets and monitors capital requirements for the Bank as a whole. In implementing current capital requirements CBB requires the Bank to maintain a prescribed ratio of total capital to total risk-weighted assets. Capital adequacy regulations of CBB is based on the principles of Basel III of the IFSB guidelines. The Bank’s regulatory capital is analysed into two tiers: • Tier 1 capital, includes CET1 and AT1. CET1 comprise of ordinary share capital that meet the classification as common shares for regulatory purposes, disclosed reserves including share premium, general reserves, legal / statutory reserve, common shares issued by consolidated banking subsidiaries of the Bank and held by third parties, retained earnings after regulatory adjustments relating to goodwill and items that are included in equity which are treated differently for capital adequacy purposes.
70 Bahrain Development Bank | Annual Report 2017
Notes to the consolidated financial statements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
29 CAPITAL ADEQUACY (CONTINUED) AT1 comprise of instruments that meet the criteria for inclusion in AT1, instruments issued by consolidated banking subsidiaries of the Bank held by third parties which meet the criteria of AT1, and regulatory adjustments applied in calculation of AT1. - Tier 2 capital, includes instruments issued by the Bank that meet the criteria for inclusion in Tier 2 capital, stock surplus resulting from issue of Tier 2 capital, instruments issued by consolidated banking subsidiaries of the Bank held by third parties that meet the criteria for inclusion in Tier 2, general provisions held against unidentified losses on financing and qualify for inclusion within Tier 2, asset revaluation Strategic Report reserve from revaluation of fixed assets and instruments purposes and regulatory adjustments applied in the calculation of Tier 2 capital. The regulatory adjustments are subject to limits prescribed by the CA module, these deductions would be effective in a phased manner through transitional arrangements from 2015 to 2018. The regulations prescribe higher risk weights for certain exposures that exceeds materiality thresholds. These regulatory adjustments required for certain items such as goodwill on mortgage service right, deferred tax assets, cash flow hedge reserve, gain on sale of related securitization transactions, defined benefit pension fund assets and liabilities, investment in own shares and reciprocal cross holdings in the capital of Banking and financial entities, investment in the capital of Banking and financial entities that are outside the scope of regulatory consolidation and where the bank does not own more than 10% of issued common shares capital of the entity and significant investments in the capital of banking and financial entities that are outside the scope of regulatory consolidation. Banking operations are categorised as either trading book or banking book, and risk-weighted assets are determined according to specified requirements that seek to reflect the varying levels of risk attached to assets and off-balance sheet exposures. Capital management
The primary objectives of the Bank’s capital management are i) to ensure that the Bank complies with externally imposed capital Corporate Governance requirements ii) maintain healthy capital ratios in order to support its business and iii) to maximise shareholders’ value. The Bank manages its capital structure and makes adjustments to it in the light of changes in business conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders or issue capital securities. Financial Statements
71 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
1 EXECUTIVE SUMMARY This report has been prepared in accordance with Pillar III disclosure requirements prescribed by the Central Bank of Bahrain, herein referred to as “CBB”. The report has been designed to provide BDB Group’s stakeholders with detailed information on the Bank’s approach in managing capital and risk, having due regard to the operating environment. The Bank applies the Basel framework in the measurement of its capital adequacy, and in its capital management strategy and risk management framework. CBB’s Basel III capital rules and guidelines became effective on 1st January 2015 as the common framework for the implementation of the Basel Committee on Banking Supervision’s (Basel Committee) Basel III capital adequacy framework for banks incorporated in the Kingdom of Bahrain. BDB has adopted the Standardized Approach for Credit Risk, Market Risk and the Basic Indicator Approach for Operational Risk to determine the capital requirement. The disclosures in this report are in addition to the disclosures set out in the consolidated financial statements for the year ended 31st December 2017 presented in accordance with the International Financial Reporting Standards (IFRS). Disclosures with respect to Corporate Governance and Remuneration are provided in relevant sections of the Annual Report.
2 INTRODUCTION TO THE BASEL III FRAMEWORK The CBB’s Basel III capital framework is based on three pillars consistent with the Basel III framework developed by the Basel Committee, as follows:- - Pillar I: calculation of the Risk Weighted Assets (RWAs) and capital requirement. - Pillar II: the supervisory review process, including the Internal Capital Adequacy Assessment Process (ICAAP). - Pillar III: rules for the disclosure of risk management and capital adequacy information. Amongst the three pillars, it is Pillar I that has been affected most and largely amended with the introduction of Basel III. Additional disclosure requirements have also been introduced under Pillar III. CBB CAPITAL ADEQUACY RULES: CBB minimum required total capital adequacy ratio (including CCB) increased from 12 percent to 12.5 percent, compared to 10.5 percent recommended by the Basel Committee. Moreover, there are newly introduced limits and minima by the CBB under Basel III, such as minimum Common Equity Tier 1 Capital Ratio “CET1” of 9 percent (including CCB) and minimum T1 Capital Ratio of 10.5 percent (including CCB). The table below summarizes the approaches available for calculating RWAs for each risk type in accordance with the CBB’s Basel III capital adequacy framework:
Credit Risk Market Risk Operational Risk Standardised Approach Standardised Approach Basic Indicator Approach Internal Models Approach Standardised Approach
For regulatory reporting purposes, BDB is using the Standardised Approach for credit risk and market risk, and Basic Indicator Approach for operational risk. i) Credit Risk Credit Risk represents the potential financial loss as a consequence of a customer’s inability to honour the terms and conditions of a credit facility. Such risk is measured with respect to counterparties for both on-balance sheet assets and off-balance sheet items. The bank has a robust credit risk management architecture which is explained in greater detail in Note 26 of the Annual Report. The Bank does not use any external credit assessment institutions and the risk rating for the exposures are based on the internal credit framework and policy guidelines of the Bank. For regulatory reporting purposes, BDB is using the Standardised Approach for credit risk.
72 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
2 INTRODUCTION TO THE BASEL III FRAMEWORK (CONTINUED) ii) Market Risk Market Risk is the risk of potential losses arising from movements in market prices of financial instruments as a result of changes in market rates (such as interest rates and foreign exchange rates). For the regulatory market risk capital requirement, BDB is using the Standardised Approach for the calculation of regulatory market risk
capital. Strategic Report iii) Operational Risk Operational Risk is the risk of monetary loss on account of human error, fraud, systems failures or the failure to record transactions. In order to manage and mitigate such risks, the Bank ensures that proper systems and resources (financial and personnel) are available to support the Bank’s operations. Proper segregation of duties and other controls (including reconciliation, monitoring and reporting) are implemented to support the various operations and activities. For the regulatory market risk capital requirement, BDB is using the Standardised Approach for the calculation of regulatory market risk capital. Regulatory Reforms The Bank is operating as a retail bank with special waivers under a license issued by the Central Bank of Bahrain (“CBB”), with headquarters and branches in Bahrain. The Bank’s capital adequacy requirements are computed on a consolidated basis. The Bank is evaluating Expected Credit Loss as per the guidelines in IFRS 9. Corporate Governance 3 GROUP STRUCTURE The Group’s financial statements are prepared and published on a full consolidation basis, with all subsidiaries being consolidated in accordance with IFRS. The Group consists of the Bank and its following subsidiaries:
Country of Ownership Name incorporation interest Year end Bahrain Business Incubator Centre (S.P.C.) Kingdom of Bahrain 100% 31 December BDB SME Fund Company BSC © * Kingdom of Bahrain 99% 31 December Bahrain Export Development Center S.P.C Kingdom of Bahrain 100% 31 December Al-Waha Venture Capital Fund Company Kingdom of Bahrain 99% 31 December Middle East Corner Consultancy CO. WLL** Kingdom of Bahrain 28.6% 31 December * The shareholders of BDB SME Fund Company in their meeting dated 14 December 2016, decided to voluntarily liquidate the Company. The Company does not have any operations. Financial Statements ** The Bank is exposed, or has rights, to variable returns from its involvement with Middle East Corner Consultancy Co. WLL; and has the ability to affect those returns through its power over Middle East Corner Consultancy Co. WLL and thus is deemed as subsidiary of the Bank. Restrictions on capital and transfer of funds within the Group Since the Bank’s subsidiaries are not regulated financial institution, there is no regulatory impediment to the transfer of retained earnings to the Bank. However, as a separate legally incorporated entity, the transfer of paid in capital and mandatory reserves would require shareholder action. As the major shareholder (either direct or indirect) in the entity, the Bank has the power to undertake the legal processes for the transfer of such capital. The Bank’s subsidiaries are registered and domiciled in Bahrain and there are no exchange controls or other restrictions on the transfer of funds.
73 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
4 CAPITAL STRUCTURE AND CAPITAL ADEQUACY The Bank’s regulatory capital base comprises of (a) CET 1 capital which includes share capital, reserves and retained earnings. (b) Tier 2 capital which consist of general loan loss provisions. Capital structure, minimum capital and capital adequacy The Bank’s paid up capital consists only of ordinary shares and does not have any other type of capital instruments. The Bank’s regulatory capital base is as detailed below:
As at 31-12-2017 Common Equity Tier 1 (CET1) Issued and full paid ordinary shares 65,000 Legal / Statutory reserve 1,186 Retained earnings 10,121 Other reserves 4,048 Current year Loss (7,660) Total Common Equity Tier 1 (CET1) (A) 72,695 Additional Tier 1 (AT1) - Total Tier 1 (T1) 72,695 Tier 2 Capital (T2) General loan loss provisions 940 Total Tier 2 (T2) (B) 940 Total Capital Base (Tier 1 + Tier 2) (C=A+B) 73,635
Credit Exposure Credit Exposure Capital before credit Eligible credit after credit Risk weighted Requirement risk mitigant Risk mitigant risk mitigant exposure at 12.5% As at 31-12-2017 Sovereigns 52,554 - 52,554 - - PSE - - - - Banks 21,710 21,710 9,794 1,224 Corporates 106,960 1,092 105,868 104,529 13,066 Regulatory retail - - - - Residential mortgages - - - - Past due exposures 12,498 22 12,476 14,702 1,838 Investments in equities/funds 5,735 5,735 8,766 1,096 Holding of Real Estate 13,665 13,665 26,620 3,328 Others assets 2,266 2,266 2,266 283 Total Credit Risk Exposure 215,388 1,114 214,274 166,677 20,835 Market Risk 213 27 Operational Risk 18,138 2,267 Total Risk Weighted Assets (D) 185,028 23,129 Capital Adequacy Ratio (B)/(D) 39.80% CET1 Capital Adequacy Ratio (A)/(D) 39.29%
74 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
5 CREDIT RISK – PILLAR III DISCLOSURES This section describes BDB’s exposure to credit risk, and provides detailed disclosures on credit risk in accordance with the CBB’s Basel III framework, in relation to Pillar III disclosure requirements. Definition of exposure classes The Bank has a diversified funded and unfunded credit exposure. These exposures are classified as standard portfolio per CBB’s Basel
III requirements. Strategic Report Brief description of applicable standard portfolio are as follows: a. Claims on banks: Claims on banks are risk weighted based on external rating agency. Short-term claims on locally incorporated banks are assigned a risk weighting of 20% where such claims on the banks are of an original maturity of three months or less and the claims are denominated and funded in either Bahraini Dinars or US Dollar. Preferential risk weight that is one category more favourable than the standard risk weighting are assigned to claims on foreign banks licensed in Bahrain of an original maturity of three months or less denominated and funded in the relevant domestic currency. Such preferential risk weight for short-term claims on banks licensed in other jurisdictions are allowed only if the relevant supervisor also allows this preferential risk weighting to short-term claims on its banks. No claim on an unrated bank would receive a risk weight lower than that applied to claims on its sovereign of incorporation. b. Claims on corporates: Corporate Governance Claims on corporates are risk weighted based on credit ratings. Risk weighting for unrated (corporate) claims are assigned at 100%. c. Impairment of assets The Bank assesses at each reporting date whether there is any objective evidence that a specific financial asset is impaired. A financial asset is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘impairment event’) and that impairment event (or events) has an impact on the estimated future cash flows of the financial asset that can be reliably estimated. Evidence of impairment may include indications that the borrower is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that it will enter bankruptcy or other financial reorganisation and where observable data indicate that there is a measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. d. Loans restructured: Where possible, the Bank seeks to restructure loans rather than to take ownership of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Management continuously reviews renegotiated loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to impairment assessment, calculated using the loan’s original effective interest rate. Financial Statements e. Past due exposures This includes claims, for which the repayment is overdue for more than 90 days. The risk weighting for such loans is either 100 percent or 150 percent is applied depending on the level of provisions maintained against the assets. f. Equity Portfolio: Investment in securities and financial entities are risk weighted at a minimum risk weight of 100% for listed entities or 150% for unlisted entities, unless such investments exceed 10% of the eligible capital of investee entity, in which case they are deducted from the Bank’s capital. g. Other exposures: These are risk weighted at 100%. h. Related party transactions and balances: Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. Related parties include entities over which the Bank exercises significant influence, major shareholders, directors and executive management of the Bank. Such related parties in the ordinary course of business at commercial interest and commission rates (Refer note 24 in the audited financial statements). Amounts due from related parties are unsecured. i. Highly leveraged counterparties The Bank does not lend to highly leveraged and other high risk counterparties as defined in PD-1-3-24(e).
75 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
6 GROSS CREDIT EXPOSURES SUBJECT TO CREDIT RISK MITIGANTS (CRM) The following are gross credit risk exposures considered for Capital Adequacy Ratio calculations comprising of banking book exposures:
As at 2017 31-12-2017 Average Balances with Central Bank of Bahrain 2,690 3,047 Investment securities 8,906 8,090 Placement with banks and other financial institutions 27,011 27,224 Islamic financing and loans to customers 114,535 122,087 Interest Receivable 217 217 Other assets 2,126 2,463 TOTAL FUNDED EXPOSURES 155,485 163,127 Contingent liabilities 3,678 4,183 Other commitments 9,993 9,318 TOTAL UNFUNDED EXPOSURES 13,671 13,501 TOTAL CREDIT RISK EXPOSURE 169,156 176,628 The gross average credit risk exposure are based on quarterly reporting.
7 SECTORAL CLASSIFICATION OF GROSS CREDIT EXPOSURES 2017 Funded Unfunded Total Government 10,280 - 10,280 Banks and financial institutions 29,701 - 29,701 Trading and Manufacturing 53,418 4,060 57,478 Educational Institutions & Healthcare 9,308 109 9,417 Hospitality, media and transportation 4,156 345 4,501 Fisheries, agriculture & dairy 5,209 - 5,209 Food processing 4,937 229 5,166 Others 38,476 8,928 47,404 TOTAL 155,485 13,671 169,156
8 CREDIT CONCENTRATION GREATER THAN 15% INDIVIDUAL OBLIGOR LIMIT
2017 Total credit exposures in excess of 15% individual obligor limit -
9 COUNTERPARTY WISE BREAKDOWN OF NON PERFORMING LOANS AND IMPAIRMENT PROVISION Impaired & past due loans Specific Charge for Collective (net of provision) Provision the year Write off impairment Project finance 25,334 18,096 8,152 4,111 940 Fisheries and Agriculture 2,170 - - - - 27,504 18,096 8,152 4,111 940
76 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
10 RESIDUAL CONTRACTUAL MATURITY Maturity analysis of assets The table below summarises the residual contractual maturity profile of the Group’s assets as at 31 December 2017
Up to 1 1 to 3 3 to 6 6 months 1 to 3 3 to 5 5 to 10 10 to 20 Above 20 month months months to 1 year years years years years years Total
2017 Strategic Report Assets Cash and balances with Central Bank of Bahrain 2,873 ------2,873 Due from banks and other financial institutions 16,310 3,630 7,071 ------27,011 Accounts receivable and other assets - - 2,940 ------2,940 Loans and advances to customers 4,849 8,099 11,946 21,955 55,129 10,387 2,619 491 - 115,475 Investment securities 716 - - 2,894 - 2,173 9,360 - - 15,143 Investment in associates ------419 - - 419 Investment property ------12,033 12,033 Property, plant and equipment ------1,216 1,216
Total assets 24,748 11,729 21,957 24,849 55,129 12,560 12,398 491 13,249 177,110 Corporate Governance
Lliabilities Deposits 30,709 4,962 7,810 2,907 52 - - - - 46,440 Accounts payable and other liabilities - - 5,371 ------5,371 Long term loans - 251 2,635 2,886 15,307 10,205 16,135 4,255 - 51,674 Total liabilities 30,709 5,213 15,816 5,793 15,359 10,205 16,135 4,255 - 103,485 (5,961) 6,516 6,141 19,056 39,770 2,355 (3,737) (3,764) 13,249
* Gross of general provision of BD940K.
11 PAST DUE AND IMPAIRED LOANS - AGE ANALYSIS 2017
Three months One to three Over three Financial Statements i) By Geographical area to one year years years Total Bahrain 22,730 3,685 1,248 27,663 TOTAL 22,730 3,685 1,248 27,663 Three months One to three Over three ii) By Counterparty wise to one year years years Total Project finance 21,042 3,458 994 25,494 Fisheries and Agriculture 1,688 227 254 2,169 TOTAL 22,730 3,685 1,248 27,663
* Gross of general provision of BD159K.
12 GEOGRAPHICAL DISTRIBUTION OF IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES TO CUSTOMERS Bank and its subsidiary is operated locally and loans granted to Bahrain entities and persons only.
2017 Bahrain Specific impairment provision 18,096 TOTAL 18,096
77 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
13 MOVEMENT IN IMPAIRMENT PROVISION FOR LOANS AND ADVANCES TO CUSTOMERS 2017 Project finance Fisheries and agriculture Specific Collective Total Specific Collective Total Total Balance at 1 January 2017 14,055 940 14,995 - - - 14,995 Amounts written off during the period (4,111) - (4,111) - - - (4,111) Charge for the period 10,629 - 10,629 - - - 10,629 Recoveries during the period (2,477) - (2,477) - - - (2,477) At 31 December 2017 18,096 940 19,036 - - - 19,036
Restructured Credit Facilities The Bank have BD 1,409 restructured credit facilities during the year ended 31 December 2017. Restructuring concessions mainly related to deferral of loan installments to assist customers overcome temporary cash crunch situations or to realign the repayment with the borrower’s revised cash flow projections.
14 CREDIT RISK MITIGATION The reduction of the capital requirement attributable to credit risk mitigation is calculated in different ways, depending on the type of credit risk mitigation. The main collaterals taken for risk mitigation on credit exposures are deposits held by customers, pledge of quoted shares, residential/commercial property mortgage, investment securities, counter-guarantees from other banks, etc. However, for purposes of capital adequacy computation, only eligible collateral recognized under Basel 3 is taken into consideration.
15 ELIGIBLE FINANCIAL COLLATERAL AND GUARANTEES Eligible financial collateral, and guarantees, presented by standard portfolio are as under:
Gross Credit exposure credit Financial after credit risk exposure collateral mitigant As at 31-12-2017 Sovereigns 52,554 - 52,554 PSE - - - Banks 21,710 - 21,710 Corporates 106,960 1,092 105,868 Regulatory retail - - - Residential mortgages - - - Past due exposures 12,498 22 12,476 Investments in equities/funds 5,735 - 5,735 Holding of Real Estate 13,665 - 13,665 Others assets 2,266 - 2,266 215,388 1,114 214,274
78 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
16 SENSITIVITY ANALYSIS - INTEREST RATE RISK (IRRBB) Impact on net interest income for the year ended 31 December 2017
2017 Bahraini Dinar Assets 186,395 Strategic Report Liabilities 152,415 (+) 200 basis points 680 (-) 200 basis points (680)
US Dollar Assets 51,648 Liabilities 51,557 (+) 200 basis points 2 (-) 200 basis points (2)
Kuwaiti Dinar Assets 2,767
Liabilities 2,615 Corporate Governance (+) 200 basis points 3 (-) 200 basis points (3)
Saudi Riyals Assets 9,131 Liabilities 9,105 (+) 200 basis points 1 (-) 200 basis points (1) Financial Statements
79 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
17 MARKET RISK, INTEREST RATE GAP Market risk Market risk is defined as potential adverse changes in the fair value or future cash flows of a trading position or portfolio of financial instruments resulting from the movement of market variables, such as interest rates, currency rates, equity prices and commodity prices, market indices as well as volatilities and correlations between markets. As its primary tool, the Bank measures its market risk exposure using the Standardised Approach under Basel III. The Bank uses the Standardised Approach for calculating market risk capital charges for the following market risk components: - Equity exposure risk - Interest rate exposure risk - Foreign currency exposure risk - Commodity risk The Bank’s market risk capital charge is largely composed of foreign currency risk arising from the Bank’s foreign exchange exposure on investments denominated mainly in Kuwaiti dinars, Saudi riyals and USD, and interest rate risk arising on the bond portfolio. The capital requirement for market risk using the Standardised Approach as at 31 December was as follows:
Capital requirements 2017 Maximum Minimum Average Risk Type Equity risk capital - - - - Foreign exchange risk capital 17 19 17 18 Interest rate risk capital - - - - Commodity risk capital - - - - Interest rate risk Interest rate risk arises from the possibility that changes the interest rates will affect future profitability or the fair values of the financial instruments. The Bank is exposed to interest rate risks due to mismatches of interest rate repricing on maturity of assets and liabilities. Positions are monitored periodically to ensure that this is maintained within the established limits. The Banks assets and liabilities reprice only on maturity. The Bank’s interest rate sensitivity position is based on the maturity dates, as follows:
Up to 1 1 to 3 3 to 6 6 months 1 to 5 Over 5 Non-interest month months months to 1 year years years bearing Total 2017 Assets Cash and balances with Central Bank of Bahrain ------2,873 2,873 Due from banks and other financial institutions 16,310 3,630 7,071 - - - - 27,011 Accounts receivable and other assets 716 - - 2,894 2,173 3,123 22,845 31,751 Loans and advances to customers * 4,849 8,099 11,946 21,955 65,516 3,110 - 115,475 Total assets 21,875 11,729 19,017 24,849 67,689 6,233 25,718 177,110 Liabilities Deposits 30,709 4,962 7,810 2,907 52 - - 46,440 Accounts payable and other liabilities ------5,371 5,371 Long term loans - 251 2,635 2,886 25,512 20,390 - 51,674 Total liabilities 30,709 5,213 10,445 5,793 25,564 20,390 5,371 103,485 Net liquidity gap (8,834) 6,516 8,572 19,056 42,125 (14,157) 20,347 * Net of general provision of BD940K.
80 Bahrain Development Bank | Annual Report 2017
Basel III Pillar III Disclosures For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
18 EQUITY POSITION IN THE BANKING BOOK 2017 Net Capital exposure requirement Publicly traded 153 19
Privately held 6,084 761 Strategic Report TOTAL 6,237 780
19 GAINS ON EQUITY INVESTMENTS
2017 (i) Realised gains/ (losses) recognised in the statement of profit or loss on sale - (ii) Unrealised gains/ (losses) recognised in the statement of financial position but not through profit or loss - (iii) Unrealised losses relating to fair value changes of FVTPL investments in profit or loss 60 The Bank does not have any equity investments subject to supervisory transition or grandfathering provisions.
20 OPERATIONAL AND LEGAL RISKS Operational risk is the risk of loss arising from errors that can be made in instructing payments or settling transactions, breakdown in technology and internal control systems. The Bank uses the Basic Indicator Approach under the Basel III framework for measuring and Corporate Governance managing its operational risk. Currently, the Bank conducts its business from a single location. BDB is a retail bank with some restrictions and accordingly, the number of client relationships and volume of transactions at BDB are moderate on average. BDB’s operations are conducted according to well-defined procedures. These procedures include a comprehensive system of internal controls, including segregation of duties and other internal checks, which are designed to prevent either inadvertent staff errors or malfeasance prior to the release of a transaction. The Bank also engages in subsequent monitoring of accounting records, daily reconciliation of cash and securities accounts and other checks to enable it detect any erroneous or improper transactions which may have occurred. Specific limits are set up to mitigate and monitor the Bank’s exposure. Operational risk is managed by the Risk management department. The scope of the Internal Audit department encompasses audits and reviews of all business units, support services and branches. The internal audit process focuses primarily on assessing risks and controls and ensuring compliance with established policies, procedures and delegated authorities. Products and services are reviewed by the Internal Audit department and assessed for operational risks. The Internal Audit department is operationally independent and reports significant internal control deficiencies to the Audit Committee. The Bank has a Business Continuity Plan (BCP) to ensure that the critical activities are supported in case of an emergency. The BCP is approved by the Board of Directors. Financial Statements Bank’s ICAAP limit of 16% has been fixed to absorb any unforseen event as compared to regulatory capital requirement of 12.5%. Legal risk is the risk arising from the potential that unenforceable contracts, lawsuits or adverse judgments can disrupt or otherwise negatively affect the operations of the group. The Group has developed controls and procedures to identify legal risks and believes that losses will not be material.
21 FINES & PENALTY Amount in BHD Actual 2017 Penalty paid to Central Bank of Bahrain 470 The penalties are related to the delays in the Fawri payments/ transfers processing within the stated real time sessions.
81 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Step 1: Balance sheet under the regulatory scope of consolidation This step in not applicable to the Bank since the scope of regulatory consolidation and accounting consolidation is identical.
82 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Step 2: Reconcilation of published financial balance sheet to regulatory reporting as at 31 December 2017 Balance sheet as in published financial Consolidated statements PIR data Assets Strategic Report Cash and balances at central banks 2,873 2,873 Placements with banks and other financial institutions 27,011 27,011 Investment securities 15,143 15,143 Investments in associates 419 419 Total Investment 15,562 15,562 of which: Significant investments in capital of financial institutions exceeds the 10% of CET1 Amount in excess of 10% of CET1 to be deducted Amount in excess of 10% of CET1 to be deducted in year 1 Investment property 12,033 12,033 Loans and advances 115,475 115,475 of which: General loan loss provision which qualify as capital 940 940 Corporate Governance Prepayments, accrued income and other assets 2,940 2,940 Property, plant and equipment 1,216 1,216 Total assets 176,170 177,110 Liabilities Deposits from banks and other financial institutions 11,356 11,356 Customer accounts 35,084 35,084 Term Loans 51,674 51,674 Repurchase agreements and other similar secured borrowing Derivative financial instruments Accruals, deferred income and other liabilities 5,371 5,371 Total liabilities 103,485 103,485 Shareholders' Equity Paid-in share capital 65,000 65,000 Financial Statements Shares under employee share incentive scheme Total share capital 65,000 65,000 of which amount eligible for CET1 - 65,000 of which amount eligible for AT1 - - Retained earnings 2,461 2,461 Statutory reserve 1,186 1,186 Other Reserve 4,048 4,048 General reserve Share premium Donations and charity reserve General loan loss provision which qualify as capital 940 Available for sale revaluation reserve Share of Available for sale revaluation reserve relating to associates not considered for regulatory capital Minority interest in subsidiaries' share capital (10) (10) Total shareholders' equity 72,685 73,625 Total liabilities & Shareholders' Equity 176,170 177,110
83 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Step 3: Composition of Capital Common Template (transition) as at 30 June 2017 Source based on reference numbers / letters of the balance Amounts sheet under the Component subject to regulatory scope of regulatory pre-2015 of consolidation No. Composition of Capital and mapping to regulatory reports capital treatment from step 2 Common Equity Tier 1 capital: instruments and reserves 1 Directly issued qualifying common share capital (and equivalent for non-joint 65,000 stock companies) plus related stock surplus 2 Retained earnings 2,461 3 Accumulated other comprehensive income (and other reserves) 5,234 4 Not Applicable - 5 Common share capital issued by subsidiaries and held by third parties - (amount allowed in group CET1) 6 Common Equity Tier 1 capital before regulatory adjustments 72,695 Common Equity Tier 1 capital: regulatory adjustments 7 Prudential valuation adjustments - 8 Goodwill (net of related tax liability) - 9 Other intangibles other than mortgage-servicing rights (net of related tax - liability) 10 Deferred tax assets that rely on future profitability excluding those arising - from temporary differences (net of related tax liability) 11 Cash-flow hedge reserve - 12 Shortfall of provisions to expected losses - 13 Securitisation gain on sale (as set out in paragraph 562 of Basel II - framework) 14 Not applicable. - 15 Defined-benefit pension fund net assets - 16 Investments in own shares (if not already netted off paid-in capital on - reported balance sheet) 17 Reciprocal cross-holdings in common equity - 18 Investments in the capital of banking, financial and insurance entities that are - outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued share capital (amount above 10% threshold) 19 Significant investments in the common stock of banking, financial and - insurance entities that are outside the scope of regulatory consolidation, net of eligible short positions (amount above 10% threshold) 20 Mortgage servicing rights (amount above 10% threshold) - 21 Deferred tax assets arising from temporary differences (amount above 10% - threshold, net of related tax liability) 22 Amount exceeding the 15% threshold - 23 of which: significant investments in the common stock of financials - 24 of which: mortgage servicing rights - 25 of which: deferred tax assets arising from temporary differences - 26 National specific regulatory adjustments - REGULATORY ADJUSTMENTS APPLIED TO COMMON EQUITY TIER - 1 IN RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT Regulatory adjustments applied to Common Equity Tier 1 due to insufficient 27 Additional Tier 1 and Tier 2 to cover deductions -
84 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Source based on reference numbers / letters of the balance Amounts sheet under the Component subject to regulatory scope
of regulatory pre-2015 of consolidation Strategic Report No. Composition of Capital and mapping to regulatory reports capital treatment from step 2 28 Total regulatory adjustments to Common equity Tier 1 72,695 29 Common Equity Tier 1 capital (CET1) - Additional Tier 1 capital: instruments 30 Directly issued qualifying Additional Tier 1 instruments plus related stock - surplus 31 of which: classified as equity under applicable accounting standards - 32 of which: classified as liabilities under applicable accounting standards - 33 Directly issued capital instruments subject to phase out from Additional Tier - 1 34 Additional Tier 1 instruments (and CET1 instruments not included in row 5) - issued by subsidiaries and held by third parties (amount allowed in group
AT1) Corporate Governance 35 of which: instruments issued by subsidiaries subject to phase out - 36 Additional Tier 1 capital before regulatory adjustments - Additional Tier 1 capital: regulatory adjustments 37 Investments in own Additional Tier 1 instruments - 38 Reciprocal cross-holdings in Additional Tier 1 instruments - 39 Investments in the capital of banking, financial and insurance entities that are - outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above 10% threshold) 40 Significant investments in the capital of banking, financial and insurance - entities that are outside the scope of regulatory consolidation (net of eligible short positions) 41 National specific regulatory adjustments -
REGULATORY ADJUSTMENTS APPLIED TO ADDITIONAL TIER 1 IN - Financial Statements RESPECT OF AMOUNTS SUBJECT TO PRE-2015 TREATMENT 42 Regulatory adjustments applied to Additional Tier 1 due to insufficient Tier 2 - to cover deductions 43 Total regulatory adjustments to Additional Tier 1 capital - 44 Additional Tier 1 capital (AT1) - 45 Tier 1 capital (T1 = CET1 + AT1) 72,695 Tier 2 capital: instruments and provisions 46 Directly issued qualifying Tier 2 instruments plus related stock surplus - 47 Directly issued capital instruments subject to phase out from Tier 2 - 48 Tier 2 instruments (and CET1 and AT1 instruments not included in rows 5 or - 34) issued by subsidiaries and held by third parties (amount allowed in group Tier 2) 49 of which: instruments issued by subsidiaries subject to phase out - 50 Provisions 940 51 Tier 2 capital before regulatory adjustments 940 Tier 2 capital: regulatory adjustments 52 Investments in own Tier 2 instruments - 53 Reciprocal cross-holdings in Tier 2 instruments -
85 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Source based on reference numbers / letters of the balance Amounts sheet under the Component subject to regulatory scope of regulatory pre-2015 of consolidation No. Composition of Capital and mapping to regulatory reports capital treatment from step 2 54 Investments in the capital of banking, financial and insurance entities thatare - outside the scope of regulatory consolidation, net of eligible short positions, where the bank does not own more than 10% of the issued common share capital of the entity (amount above the 10% threshold) 55 Significant investments in the capital banking, financial and insurance entities - that are outside the scope of regulatory consolidation (net of eligible short positions) 56 National specific regulatory adjustments - REGULATORY ADJUSTMENTS APPLIED TO TIER 2 IN RESPECT OF - AMOUNTS SUBJECT TO PRE-2015 TREATMENT OF WHICH: [INSERT NAME OF ADJUSTMENT] - OF WHICH: … - 57 Total regulatory adjustments to Tier 2 capital - 58 Tier 2 capital (T2) 940 59 Total capital (TC = T1 + T2) 73,635 RISK WEIGHTED ASSETS IN RESPECT OF AMOUNTS SUBJECT TO PRE- 2015 TREATMENT 60 Total risk weighted assets 185,028 Capital ratios 61 Common Equity Tier 1 (as a percentage of risk weighted assets) 39.29% 62 Tier 1 (as a percentage of risk weighted assets) 39.29% 63 Total capital (as a percentage of risk weighted assets) 39.80% 64 Institution specific buffer requirement (minimum CET1 requirement plus 9.00% capital conservation buffer plus countercyclical buffer requirements plus D-SIB buffer requirement expressed as a percentage of risk weighted assets) 65 of which: capital conservation buffer requirement 2.50% 66 of which: bank specific countercyclical buffer requirement (N/A) 0.00% 67 of which: D-SIB buffer requirement (N/A) 0.00% 68 Common Equity Tier 1 available to meet buffers (as a percentage of risk 39.29% weighted assets) National minima including CCB (if different from Basel 3) 69 CBB Common Equity Tier 1 minimum ratio 9.00% 70 CBB Tier 1 minimum ratio 10.50% 71 CBB total capital minimum ratio 12.50% Amounts below the thresholds for deduction (before risk weighting) 72 Non-significant investments in the capital of other financials 729
86 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Source based on reference numbers / letters of the balance Amounts sheet under the Component subject to regulatory scope
of regulatory pre-2015 of consolidation Strategic Report No. Composition of Capital and mapping to regulatory reports capital treatment from step 2 73 Significant investments in the common stock of financials 239 74 Mortgage servicing rights (net of related tax liability) - 75 Deferred tax assets arising from temporary differences (net of related tax - liability) Applicable caps on the inclusion of provisions in Tier 2 76 Provisions eligible for inclusion in Tier 2 in respect of exposures subject to 940 standardised approach (prior to application of cap) 77 Cap on inclusion of provisions in Tier 2 under standardised approach (1.25% 2,083 of Credit Risk weighted Assets) 78 NA -
79 NA - Corporate Governance Capital instruments subject to phase-out arrangements (only applicable between 1 Jan 2020 and 1 Jan 2024) 80 Current cap on CET1 instruments subject to phase out arrangements - 81 Amount excluded from CET1 due to cap (excess over cap after redemptions - and maturities) 82 Current cap on AT1 instruments subject to phase out arrangements - 83 Amount excluded from AT1 due to cap (excess over cap after redemptions - and maturities) 84 Current cap on T2 instruments subject to phase out arrangements - 85 Amount excluded from T2 due to cap (excess over cap after redemptions - and maturities Financial Statements
87 Bahrain Development Bank | Annual Report 2017
Composition of capital disclosure requirements For the year ended 31 December 2017 (Expressed in Thousand Bahrain Dinars)
Disclosure template for main feature of regulatory capital instruments 1 Issuer Bahrain Development Bank BSC 2 Unique identifier (Bahrain Bourse ticker) BDB All applicable laws and regulations of the Kingdom of 3 Governing law of the instrument Bahrain Regulatory treatment 4 Transitional CBB rules Common Equity Tier 1 5 Post-transitional CBB rules Common Equity Tier 1 6 Eligible at solo/group/group & solo Group 7 Instrument Type Common Equity shares 8 Amount recognized in regulatory capital (currency in Millions, as of most recent reporting date) 65,000.00 9 Par Value of instrument BD1.00 10 Accounting classification Shareholders’ Equity 11 Original date of issuance Not Applicable 12 Perpetual or dated Not Applicable 13 Original maturity date Not Applicable 14 Issuer call subject to prior supervisory approval Not Applicable 15 Optional call date, contingent call dates and redemption amount Not Applicable 16 Subsequent call dates, if applicable Not Applicable Coupons / dividends Not Applicable 17 Fixed or floating dividend/coupon Not Applicable 18 Coupon rate and any related index Not Applicable 19 Existence of a dividend stopper Not Applicable 20 Fully discretionary, partially discretionary or mandatory Not Applicable 21 Existence of step up or other incentive to redeem Not Applicable 22 Noncumulative or cumulative Not Applicable 23 Convertible or non-convertible Not Applicable 24 If convertible, conversion trigger (s) Not Applicable 25 If convertible, fully or partially Not Applicable 26 If convertible, conversion rate Not Applicable 27 If convertible, mandatory or optional conversion Not Applicable 28 If convertible, specify instrument type convertible into Not Applicable 29 If convertible, specify issuer of instrument it converts into Not Applicable 30 Write-down feature Not Applicable 31 If write-down, write-down trigger(s) Not Applicable 32 If write-down, full or partial Not Applicable 33 If write-down, permanent or temporary Not Applicable 34 If temporary write-down, description of write-up mechanism Not Applicable Position in subordination hierarchy in liquidation (specify instrument type immediately senior to 35 instrument) Not Applicable 36 Non-compliant transitioned features Not Applicable 37 If yes, specify non-compliant features Not Applicable
88